Directive 2003/87/EC
of the European Parliament and of the Council of
13 October 2003 establishing a scheme for greenhouse gas
emission allowance trading within the Community and amending
Council Directive 96/61/EC

EU ETS

The European Union
Emissions Trading System

European allowance
unit

An
allowance within the meaning of the European Union Greenhouse Gas Emission
Allowance Trading Directive , but excluding allowances
issued in respect of aviation activities

Excise Tariff
Act

Excise Tariff Act
1921

Fuel Tax
Act

Fuel Tax Act
2006

GST

Goods and Services
Tax

Kyoto
unit

An Assigned Amount
Unit, a Certified Emission Reduction unit, an Emission Reduction
Unit, a Removal Unit or a prescribed unit issued in accordance with
the Kyoto rules

Background

Clean Energy
Legislation

The Australian Government accepts
the advice of scientists that greenhouse gas emissions are
contributing to climate change and this poses great risks to our
environment, our economy and our society.

That is why Australia is joining
with the rest of the world in cutting carbon pollution dramatically
over coming decades. The economies that accept this challenge
are those that will be more competitive in the years
ahead.

Delayed action is a false economy,
raising the economic costs of action and risking worse impacts from
the effects of climate change. As Australia
produces more carbon pollution per head of population than any
developed country in the world and is within the top 20 in terms of
absolute emissions, we have no choice but to act strongly to reduce
our levels of pollution.

A broad-based carbon price is the
most environmentally effective and cheapest way to reduce
pollution. A carbon price puts a price tag on carbon
pollution.

The carbon price is now creating
powerful incentives for all businesses to cut their pollution by
investing in clean technology or finding more efficient ways of
operating. It is now creating economic incentives to reduce
pollution in the cheapest possible ways, rather than relying on
more costly approaches such as government regulation and direct
subsidies.

These incentives are now flowing
through the economy. The carbon price makes lower-polluting
technologies, especially clean energy technologies, more
competitive and boosts investment in these technologies. In
this way, introducing a price on carbon is triggering the
transformation of the economy towards a clean energy
future.

A cap and trade emissions trading
scheme, as will be in force from 1 July 2015, places a cap on the
amount of pollution that covered sectors can emit. That cap
declines over time, allowing Australia to meet our emissions
reduction targets. The carbon price is then set by the market
as it determines the least cost ways of reducing carbon
pollution.

The Clean Energy Legislative Package
implements the carbon pricing mechanism and provides that it may be
linked to credible overseas emissions trading schemes and to the
Carbon Farming Initiative. It also provides for assistance to
households and industry, to assist households with the impact of
the carbon price, support jobs, protect the competitiveness of
emissions-intensive trade-exposed industries and support energy
security.

Further detail about the policy
context of the Clean Energy Legislative Package is set out in the
Explanatory Memorandum for the Clean Energy Bill 2011. [1]

â¢
limits on issue of carbon units at auction without a pollution cap
in place;

â¢
the content of Measurement Determinations under the NGER Act;

â¢
the treatment of natural gas under the carbon pricing mechanism;
and

â¢
the treatment of GST joint venture operators in the Opt-in
Scheme.

On 28 August 2012
the Australian Government and the European Commission announced
that the carbon pricing mechanism would be linked with the
EU ETS.

Under this arrangement, Australian liable entities
will be able to use European allowance units to meet up to
50 per cent of their liabilities under the carbon pricing
mechanism from the commencement of the flexible
price period on 1 July
2015. This ensures that Australian liable entities have
access to a broader range of credible, low-cost abatement from an
established market. This will allow for a smoother transition
from the fixed price to a market based, emissions trading
scheme.

Full linking will also allow companies that
operate in both Europe and Australia to access units which are
fully transferable in both jurisdictions, making compliance simpler
and making it easier to manage emissions across
operations.

The EU ETS is
a mandatory emissions trading system that operates across the
European Union, covering all 27 EU member states, along with
Norway, Iceland and Liechtenstein. Operating since 2005, the
EU ETS is the world’s largest emissions trading scheme,
covering some 11,000 facilities. It has delivered
cost-effective emissions reductions. In 2011, emissions had
fallen 17.5 percent below 1990 levels in the European
Union.

As part of this
arrangement, the Government agreed that it would remove the price
floor and restrict the quantity of eligible Kyoto units that liable
entities can use to discharge their carbon pricing
liabilities. These changes will reduce the complexity of the
linking arrangement and facilitate the convergence of Australian
and European carbon prices.

This means that
from 1 July 2015 Australia’s carbon price will reflect that
of our second largest trading bloc, and be consistent with at least
30 other countries - including the United Kingdom, France and
Germany.

It also means that
the carbon price will be fixed for only three years, before
becoming an internationally linked emissions trading scheme where
the market sets the carbon price.

The amendment
bills package makes provision for the linking of the Australian
carbon pricing mechanism with overseas emissions trading schemes,
including the EU ETS. The amendments are designed to enable
the Government to make and implement arrangements to link with a
variety of schemes, and are therefore designed to provide
appropriate flexibility for the Government in implementing these
technical arrangements.

The global carbon
market is growing year by year with markets emerging across the
globe.

â¢
The EU ETS currently operates in 30 European countries.

â¢
Emissions trading schemes are also operating in New Zealand,
Switzerland and at the provincial level in Japan and in nine US
States.

â¢
In 2013, emissions trading schemes are legislated to commence in
the US state of California, in the Canadian province of
Quebec. China aims to commence pilot emissions trading
schemes in seven provinces and cities.

â¢
South Korea, Australia’s fourth largest trading partner, has
also legislated an emission trading scheme which is set to commence
in 2015.

â¢
Market-based emissions reduction policies are also under
consideration or development in Brazil, Chile, Columbia, Costa
Rica, Jordan, India, Indonesia, Mexico, Morocco, South Africa,
Thailand, Turkey, Ukraine, Vietnam and in the Canadian
provinces of British Columbia, Ontario and Manitoba.

Under the linking
arrangement, Australian liable entities may only use eligible Kyoto
units to meet 12.5 per cent of their total liability. This
will continue until at least 2020. Furthermore, the
Government may, through regulations, introduce additional or
alternative quantitative limits on the use of eligible
international emissions units. This will provide the
Government the flexibility to respond to changing international
circumstances as needed.

However, the
Government is conscious of the need to provide a stable market and
investment environment. It is committed to provide at least
three years’ notice before new designated limits are
introduced or changes to existing designated limits are due to take
effect.

Under the linked arrangement, the
price floor will no longer operate in the first three years of the
flexible price period, thus facilitating the convergence of the EU
and Australian carbon prices. This will be achieved by
removing the requirement for a minimum auction reserve price for
the financial years 2015-16, 2016-17 and 2017-18 from
the CE Act, the CE (Unit Issue Charge-Auctions)
Act ,
the CE (Charges-Customs) Act, and the CE
(Charges-Excise) Act, as well as removing the requirement for a surrender
charge on eligible international emissions units by repealing the
Clean Energy (International Unit
Surrender Charge) Act 2011 .

In making these changes, it is also
necessary to ensure that the equivalent carbon price paid by users
of liquid fuels and synthetic greenhouse gases is more clearly
reflective of the carbon price under the linking
arrangements. To this end, the application of an equivalent
carbon price is amended in the Fuel Tax Act, the Excise Tariff Act,
the SGG (Import) Act and the SGG (Manufacture) Act to introduce a
new concept: the ‘per-tonne carbon price
equivalent’.

The Regulator will determine and
publish the equivalent carbon price within seven business days
after the last day of each May and November (starting in May 2015),
subject to a requirement that the maximum per-tonne carbon
price equivalent is equal to the 6-monthly auction
price.

Amendments
to the ANREU Act ensure that linking can occur, even in the event
that it is not possible to implement a direct registry link between
the carbon pricing mechanism and an overseas emissions trading
scheme. Indirect linking may be given effect by the
Government issuing AIIUs to holders of an ANREU account, where
these units are backed by foreign emissions units. The
Government has also been given powers to open and operate an
overseas registry account and to alter the way in which AIIUs are
managed in the ANREU as circumstances
necessitate.

There are also technical amendments
to enhance the auction scheme. The limit on advance-auctioned
carbon units is increased to 40 million units for carbon units
whose vintage is 2015-16 that are auctioned in 2013-14 and 20
million units for other advance auctions where there is no carbon
pollution cap number for that year. The final
details of the auction arrangements are determined by the
legislative instrument under section 113 of the CE Act which
is expected to be made in early 2013 after further consultation
with industry. The Government has decided that there will no
longer be auctions of relinquished carbon units. Instead, if a carbon
unit is relinquished, it is cancelled, and a new carbon unit will
be auctioned.

Minor and technical amendments to
the CE Act and the NGER Act provide the Minister with the power to
determine methods to measure amounts of designated fuels and
methods to adjust liabilities relating to potential greenhouse gas
emissions. Minor amendments to the CE Act also clarify the
treatment of GST joint venture operators in the Opt-in
Scheme.

Lastly, more flexibility is provided
around how the supply and use of natural gas is treated under the
CE Act. These amendments help to maintain competitive
neutrality by supporting the complete coverage of natural gas under
the carbon pricing mechanism.

Date of effect:

Sections 1, 2 and 3 commence on the
date the bill receives the Royal Assent.

Schedule 1, Parts 1 and 3, which
make general amendments to the Australian National Registry of Emissions
Units Act 2011 (ANREU Act) and the CE Act, will commence
on the day after the bill receives the Royal
Assent.

Schedule 1, Part 2, which makes
amendments relating to fuel to the CE Act and the NGER Act, will
commence on 1 July 2013. The amendments to the NGER Act made
by this Part apply to reports relating to the 2012-13
financial year and all subsequent years.

Excise Tariff Amendment
(Per-tonne Carbon Price Equivalent) Bill 2012

Schedule 1 takes effect immediately
after the commencement of Part 1 of Schedule 1 to the
Clean Energy Amendment
(International Emissions Trading and Other Measures) Act
2012.

All other sections of the bill take
effect the day that Act receives the Royal
Assent.

Schedule 1 takes effect immediately
after the commencement of Part 1 of Schedule 1 to the
Clean Energy Amendment
(International Emissions Trading and Other Measures) Act
2012.

All other sections of the bill take
effect the day that Act receives the Royal
Assent.

Clean Energy
(Charges—Excise) Amendment Bill 2012

Schedule 1 takes effect at the same
time as Part 1 of Schedule 1 to the Clean Energy Amendment (International Emissions
Trading and Other Measures) Act 2012.

The remainder of the bill takes
effect the day that Act receives the Royal
Assent.

Clean Energy
(Charges—Customs) Amendment Bill 2012

Schedule 1 takes effect at the same
time as Part 1 of Schedule 1 to the Clean Energy Amendment (International Emissions
Trading and Other Measures) Act 2012.

The remainder of the bill takes
effect the day that Act receives the Royal
Assent.

Clean Energy (Unit Issue
Charge— Auctions) Amendment Bill
2012 .

Schedule 1 takes effect at the same
time as Part 1 of Schedule 1 to the Clean Energy Amendment (International Emissions
Trading and Other Measures) Act 2012.

The remainder of the bill takes
effect the day that Act receives the Royal
Assent.

Proposal
announced:

The Acts which make up the Clean
Energy Legislative Package passed the Senate on 8 November 2011 and
variously received the Royal Assent in late November and early
December 2011.

The measures in the Clean Energy
Legislative Package are based on the announcement on 10 July 2011
and the publication of Securing
a clean energy future: The Australian Government’s climate
change plan .

On 5 December 2011, the Government
announced that it had agreed with European Union Commissioner for
Climate Action, Ms Connie Hedegaard, terms of reference for
discussions on linking the carbon pricing mechanism and the
EU ETS. At this time, the Minister for Climate Change
and Energy Efficiency, the Hon Greg Combet AM MP, said
that:

‘ Now
that Australia's carbon price is the law, the Australian Government
will focus on linking our scheme to international carbon markets
and other emissions trading schemes.

‘Expanding international
carbon markets is good for the environment and good for economic
growth. It allows global emissions to be reduced in the most
cost-effective and efficient way. ’ [2]

On 28 August 2012, the Government
announced arrangements to link the carbon pricing mechanism to the
EU ETS.

Those amendments which make minor
and technical amendments concern the operation of measures
previously announced as part of the Clean Energy Legislative
Package and, therefore, have not been the subject of any further
specific announcements.

Financial
impact:

These amendments are not anticipated to have a
financial impact.

Summary of regulation impact
statements

Interim partial link between the
EU ETS and the Australian carbon pricing
mechanism

Impact :

The Regulation Impact Statement (RIS) for linking the carbon
pricing mechanism with the EU ETS is available
at http://ris.finance.gov.au .
The RIS was prepared by DCCEE and has been assessed as adequate by
the Office of Best Practice
Regulation.

Main
points:

The introduction
of a partial link between the EU ETS and the carbon pricing
mechanism will provide Australian liable entities with immediate
access to credible international units for compliance via the
world’s largest carbon market for the first three years of
the flexible price period. Liable entities will also retain
access to Kyoto units.

This arrangement
will improve the overall stability and ongoing credibility of the
carbon pricing mechanism, as well as avoid potential complexity
associated with the implementation of price floor
arrangements. A link may also lower transaction costs for
entities with liabilities under both schemes. It will also
support the development of global carbon markets and ultimately,
global action on climate change.

Recipients of
assistance in the form of free permits, such as entities receiving
assistance under the Jobs and Competitiveness Program may receive a
higher effective rate of assistance due to price differentials
between carbon units and eligible Kyoto
units.

On the other hand,
the domestic carbon price will be affected by decisions taken in
Europe to support the price of European allowance units, while for
a small number of businesses the change in the treatment of
international units may create additional low-level administrative
costs.

Further impacts of
these arrangements on the domestic carbon price and the cost of
compliance will depend on prevailing market prices for Kyoto units
and European allowance units once the carbon pricing mechanism
commences its flexible price phase. Under the carbon price
projections in the 2012-13 Budget, drawn from the Strong Growth, Low Pollution
modelling report, there would be no impact on domestic carbon
prices of establishing a partial link to the EU ETS under
these interim arrangements. This is because the international
carbon price is projected to be above the price floor and because
the projections assume a single international unit price and do not
distinguish between Kyoto unit and European allowance unit
prices.

If the market
prices of Kyoto units and European allowance units differ, with
European allowance units trading at a premium to Kyoto units, the
Australian domestic carbon price would be expected to equal the
prevailing European allowance unit price, as the proposed
quantitative sub-limit on the use of Kyoto units implies that some
liable entities would need to use European allowance units for
compliance purposes. The average cost of meeting a given
domestic carbon liability would also be less than the Australian
carbon price because all liable entities would be able to use lower
cost Kyoto units for a portion of their liability, rather than
meeting their full liability through the surrender of carbon units
and European allowance units valued at the Australian carbon
price.

On balance, the
advantages of providing liable entities with access to another
secure source of international units, greater effective assistance
to recipients of free permits and reduced administrative complexity
outweigh these costs. Therefore, it was decided that the
Government would establish a partial link between the carbon
pricing mechanism and the EU ETS, including not implementing
the price floor and introducing an additional quantitative
sub-limit on the use of eligible Kyoto units for compliance with
obligations under the carbon pricing mechanism. This
sub-limit percentage should be set such that some European
allowance units are used for compliance, while retaining access to
Kyoto units.

Carbon Auction Schedule, frequency
and collateral

Impact :

The Regulation Impact Statement (RIS) for auctions of carbon units
will be made available at http://ris.finance.gov.au .
The RIS was prepared by DCCEE and has been assessed as adequate by
the Office of Best Practice
Regulation.

Main
points:

From 1
July 2015 the carbon pricing mechanism will transition to an
emissions trading scheme and the carbon price will be set by the
market through auctions. The auctions will sell carbon units
for a particular ‘compliance year’, most carbon units
will be sold in their compliance year, however some will be sold in
advance of the compliance year, and some after it. A carbon
unit auction limit applies to the amount of units from a compliance
year that can be auctioned in an earlier year. It is aimed at
preventing over-allocation before the pollution cap is known for a
given compliance year.

The carbon unit auction limit will be increased
from 15 million to 40 million for 2015-16 units auctioned in
2013-14, and 20 million for all other advance auctions before a
pollution cap is set . Increasing this limit
provides additional flexibility for the auctioning of
units.

Increasing the
carbon unit auction limit is not expected to have a financial
impact.

Statement of Compatibility
with Human Rights

Prepared
in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act
2011 .

These
bills are compatible with the human rights and freedoms recognised
or declared in the international instruments listed in section 3 of
the Human Rights
(Parliamentary Scrutiny) Act 2011 .

Overview of the
bills

These
bills amend the Clean Energy
Act 2011 (CE Act)
to:

â¢ give effect to
the arrangement to link Australia’s carbon pricing mechanism
and the European Union Emissions Trading System (EU ETS) by
removing the price floor for carbon units and limiting the use of
Kyoto units for compliance purposes under the CE
Act;

â¢
provide for the calculation of an equivalent carbon price that
reflects liable entities’ cost of compliance under a linking
arrangement;

â¢ increase the
limit on advance-auctioned carbon
units;

â¢ prevent units
being issued at auction more than three years in advance of their
vintage year;

â¢ change the
treatment of relinquished carbon
units;

â¢ allow
regulations to be made to determine how specific
circumstances relating to the supply and use of natural
gas are treated under the CE
Act .

These bills
amend the Australian
National Registry of Emissions Units Act 2011 to:

â¢ enable European
allowance units to be held in the Australian National Registry of
Emissions Units (ANREU), and used for compliance purposes under the
CE Act;

â¢ in the event
that a direct link with a foreign emissions trading scheme,
including the EU ETS, is not possible, to enable the Clean Energy
Regulator to issue Australian-issued international units (AIIUs)
which correspond to foreign emissions units withdrawn from
circulation within the relevant foreign registry, and which can be
used for compliance purposes under the CE
Act.

Human rights
implications

The bills
engage the right to privacy in four
respects:

â¢ The bills
enable the making of regulations which could require certain
persons who receive natural gas to provide personal information, in
the form of an ‘own-use notification’, to the supplier
of the gas. The personal information would encompass
information identifying the person, information as to whether the
person intends to consume natural gas supplied to the person, and
other prescribed information. It is anticipated that notices
would ordinarily be given by bodies corporate, rather than
individuals. The notices are intended to enable
identification of the liable entity in relation to the supply of
gas. This purpose is both reasonable and consistent with the
objectives of the International Covenant on Civil and Political
Rights (ICCPR). A statement of compatibility with human
rights, including the right to privacy, would be prepared in
relation to any regulation made under this regulation-making
power.

â¢ The bills
provide for the publication of information about any relinquishment
requirements that apply to a person in relation to an AIIU, and any
non-compliance with those requirements, either on the Liable Entity
Public Information Database (LEPID) (if the person is a liable
entity) or on the Clean Energy Regulator’s (the Regulator)
website (if the person is not). A court may order a person to
relinquish AIIUs if the person has been convicted of a dishonesty
offence and the court is satisfied that the issue of the units was
directly or indirectly attributable to the commission of the
offence. The provisions mirror existing provisions around the
publication of compliance information in relation to carbon units,
and are intended to promote transparency in the operation of the
carbon pricing mechanism and confidence in its integrity. The
nature of the information to be published is precisely defined and
the publication requirement does not involve the exercise of any
discretionary powers. The publication of this information is
therefore considered reasonable and consistent with the objectives
of the ICCPR.

â¢ The bills
enable the making of regulations which could require the Regulator
to publish on the Regulator’s website information relating to
the registered holder of prescribed international units. The
regulation-making power is intended to promote transparency in the
operation of any linking arrangement with a foreign registry.
A statement of compatibility with human rights, including the right
to privacy, would be prepared in relation to any regulation made
under this regulation-making
power.

â¢
The bills also enable the making of regulations which could require
a person to notify a matter to the Regulator. This could
involve the disclosure of personal information to the
Regulator. Any information disclosed to the Regulator would
be subject to the secrecy provisions in Part 3 of the
Clean Energy Regulator Act
2011 and could only be disclosed by the Regulator in the
circumstances provided for in that Part. A statement of
compatibility with human rights, including the right to privacy,
would be prepared in relation to any regulation made under this
regulation-making power.

Conclusion

The bills
are compatible with human rights because to the extent that it may
limit human rights, those limits are reasonable, necessary and
proportionate.

Outline of chapter

1.1
Chapter 1 describes the amendments necessary to facilitate the
linking of the carbon pricing mechanism with overseas emissions
trading schemes, including the following specific amendments:

â¢
amendments to the ANREU Act to include European allowance units as
prescribed international units;

â¢ amendments to the ANREU Act
to provide flexibility to the Government to link with emissions
trading schemes where direct linking of registries is not
possible;

â¢
amendments to the CE Act and associated acts to remove the price
floor and associated provisions;

â¢
amendments to the CE Act to allow regulations to be made to
introduce one or more additional quantitative limits on a liable
entity’s use of eligible international emissions units,
referred to as a designated limit;

â¢
amendments to the CE Act to establish a 12.5 per cent
designated limit on the surrender of eligible Kyoto units;

â¢
amendments to the CE Act to ensure the appropriate interaction of
designated limits, the existing 50 per cent surrender
limit on eligible international emissions units (now referred to as
the general limit) and over-surrender provisions; and

â¢
amendments to the CE Act, the Fuel Tax Act, the Excise Tariff Act,
the SGG (Import Levy) Act and the SGG (Manufacture Levy) Act to
adjust the
calculation of the equivalent carbon price to ensure that
it remains clearly
equivalent to the effective carbon price faced by liable entities
under the carbon pricing
mechanism.

Context of amendments

1.2
The CE Act allows eligible international emissions units to be
surrendered to meet liabilities under the carbon pricing mechanism
after 1 July 2015. This ensures that Australian liable
entities have access to international abatement opportunities,
lowering the economic cost of meeting emissions targets.

1.3
Some units issued under the Kyoto Protocol have been defined as
eligible international emissions units and may be used to meet
liabilities after 1 July 2015. Under section 133 of the CE
Act, these units are subject to a surrender limit such that they
can be used for no more than 50 per cent of total
liabilities in the first five years of the flexible price period
(that is from 1 July 2015 until 30 June 2020).

1.4
On 28 August 2012, the Government announced that it would link the
carbon pricing mechanism with the EU ETS. Under this
arrangement, European allowance units will be able to be used for
compliance under the carbon pricing mechanism.

1.5
The Government also agreed that it would remove the price floor and
restrict the quantity of eligible Kyoto units that liable entities
can use to discharge their carbon pricing liabilities. This
additional restriction on the use of Kyoto units, set at
12.5 per cent of an entity’s liability, will
operate within the existing 50 per cent restriction on
the use of eligible international emissions units.

Summary of new law

Use of eligible international emissions units
for compliance under the carbon pricing
mechanism

1.6
A ‘European allowance unit’ is defined as a prescribed
international unit under section 4 of the ANREU Act. This
means European allowance units may be surrendered to discharge
liabilities under the carbon pricing mechanism from the
2015-16 financial year.

1.7
A legislative power to impose one or more designated limits on
eligible international emissions units is provided under section
123A of the CE Act. A designated limit constrains the number
of eligible international emissions units of a certain class or
classes of unit that a liable entity can surrender in relation to a
given financial year. The Government is very conscious of the
need for a stable market and investment environment going
forward. The Government is committed to providing at least
three years’ notice before introducing new or modifying
existing designated limits. However, only one year’s
notice may be given if a designated limit is necessary to
facilitate the linking of Australia’s emissions trading
scheme with another emissions trading scheme, as these links are
anticipated to be beneficial in nature.

1.8
A designated limit on the use of eligible Kyoto units of
12.5 per cent of liability will apply from 1 July 2015,
the first year that international units can be surrendered.
Regulations may broaden the application of this limit to apply to
additional classes of eligible international emissions units, known
as ‘listed units’,with the exception of European
allowance units or AIIUs issued in relation to European allowance
units. From the 2020-21 financial year the designated limit
percentage for this limit may be changed by regulations.

1.9
For the financial years from 2015-16 to 2019-20 inclusive,
designated limits will act as supplementary limits to the existing
50 per cent limit on the surrender of eligible
international emissions units, which is now known as the
‘general limit’.

1.10
The 50 per cent general limit on the surrender of
eligible international emissions units will still expire on 30 June
2020.

1.11
Eligible international emissions units surrendered in excess of an
applicable designated limit or the general limit in a given
financial year are treated as having been surrendered for the next
financial year.

Registry amendments to facilitate
linking

1.12
The ANREU Act is amended to allow for linking to international
carbon markets where a direct (registry-to-registry) link is not
possible.

1.13
A new class of prescribed international unit known as AIIUs is
created under Part 4 of the ANREU Act. Regulations will
stipulate the process for issuing AIIUs and may alter transfer
provisions relating to these units.

1.14
Amendments provide for the cancellation and relinquishment of
AIIUs.

Removal of the price
floor

1.15
The price floor will not be implemented, and the requirement for a
minimum auction reserve price for the financial years 2015-16,
2016-17, and 2017-18 is removed from the CE Act and related
Acts.

1.16
The requirement for a surrender charge on eligible
international emissions units has also been removed
and the Clean
Energy (International Unit Surrender Charge) Act 2011 is
repealed.

1.17
The Minister may still determine an auction ‘reserve charge
amount’ to enhance price discovery at auctions.

1.18
The CE Act, the Fuel Tax Act, the Excise Tariff Act, the SGG
(Import Levy) Act and the SGG (Manufacture Levy) Act collectively
ensure that the equivalent carbon price applied to liquid fuels and
synthetic greenhouse gases reflects the cost of compliance faced by
liable entities under the carbon pricing mechanism. The
amendments mean that the equivalent carbon price reflects the
impact of quantitative limits on the surrender of eligible
international units.

1.19
The Regulator will publish auction results for the 11 months ending
31 May 2015. This ensures that, if no auctions take place in
the six months prior to May 2015, then the average auction unit
carbon price can be calculated.

Comparison of key features of new law and
current law

New
Law

Current
Law

Use of eligible international
units for compliance under the carbon pricing
mechanism

European allowance
units can be surrendered to discharge liabilities under the carbon
pricing mechanism from 2015-16. A designated limit on the use
of eligible Kyoto units of 12.5 per cent of liability
will also apply from 2015-16. Regulations may broaden the
application of this limit to apply to additional classes of
eligible international emissions units, known as ‘listed
units’,with the exception of European allowance units or
AIIUs issued in relation to European allowance units. From
the 2020-21 financial year the designated limit percentage for this
limit may be changed by regulations

The Government
will have the power to apply additional designated limits on the
use of eligible international emissions units. From 2015-16
to 2019-20, designated limits will operate within the existing
50 per cent limit on the surrender of eligible
international emissions units (the general
limit).

Units surrendered
in excess of designated or general limits will be treated as having
been surrendered in the following financial year.

European allowance
units are not eligible for use in the carbon pricing
mechanism. Other than a 50 per cent limit on the
surrender of eligible international units, no additional limits
will apply from 2015-16.

Registry amendments to
facilitate linking

The ANREU Act
allows for linking to international carbon markets where a direct
(registry-to-registry) link is not
possible.

A new class of
prescribed international unit known as AIIUs is created under Part
4 of the ANREU Act. Regulations will stipulate the process
for issuing AIIUs and may alter transfer provisions relating to
these units.

Provision is made
for the cancellation and relinquishment of
AIIUs.

The Registry only
provides for the direct (registry-to-registry) linking of emissions
trading schemes.

Removal of the price
floor

The price floor
will not be implemented.

No charge imposed
on the surrender of eligible international emissions
units.

If an eligible
international emissions unit is surrendered in relation to 2015-16,
2016-17 or 2017-18, a charge is imposed by the Clean Energy (International Unit Surrender
Charge) Act 2011 .

No minimum auction
reserve charge.

Minimum auction
reserve charges of $15 for 2015-16; $16 for 2016-17; and $17.05 and
for 2017-18 are specified in legislation and apply if regulations
are in force for determining the surrender charge on international
units.

The equivalent
carbon price applied to liquid fuels and synthetic greenhouse gases
will reflect the impact of quantitative limits on the surrender of
eligible international units. This will align it with the
cost of compliance faced by liable entities under the carbon
pricing mechanism.

There is no
provision for an equivalent carbon price that reflects the impact
of quantitative limits on the surrender of eligible international
units.

Detailed explanation of new
law

Preliminaries

1.20
The bill, once enacted, will be called the ‘Clean Energy
Amendment (International Emissions Trading and Other Measures) Act
2012’. [Clause 1, Clean Energy Amendment
(International Emissions Trading and Other Measures) Bill
2012]

1.22
Sections 1, 2 and 3 of the bill commence on the date the bill
receives the Royal Assent. Schedule 1, Parts 1 and 3, which
make general amendments to the Australian National Registry of Emissions Units
Act 2011 (ANREU Act) and the CE Act, will commence on
the day after the bill receives the Royal Assent.
[Clause 2, Clean Energy Amendment (International
Emissions Trading and Other Measures) Bill
2012]

Use of eligible international emissions units
for compliance under the carbon pricing
mechanism

European allowance units as prescribed
international units

1.30
A ‘European allowance unit’ is defined as an allowance
that is issued by, or under the authority of, a country
implementing the European Union
Greenhouse Gas Emission Allowance Trading Directive (the
EU Directive) as amended [Item 4, section 4, ANREU Act] [Item 36,
section 5, CE Act] . The
Directive is numbered 2003/87/EC
and was made by the European Parliament and the Council of the
European Union on 13 October 2003. [Item 5, section 4, ANREU
Act] It establishes a scheme for
greenhouse gas emission allowance trading within the European
Union. [3]
Each European Union member state implements the EU Directive
through its respective national laws. The other states
participating in the EU ETS, which at present include Iceland,
Liechtenstein and Norway, have also implemented the EU Directive
through their own laws. [4]

1.31
The definition of ‘European allowance unit’ includes
all units issued under the EU Directive, except those issued for
aviation activities as set out in Annex 1 of the EU
Directive. European aviation allowances are a subclass of
European allowance units that can currently only be used for
compliance by aircraft operators that have a liability under the
EU ETS. As this class of units is not intended to be
eligible for surrender in the carbon pricing mechanism, they have
been explicitly excluded from the definition. [Item 4, section 4, ANREU
Act]

1.32
European allowance units are included in the definition of
‘prescribed international unit’ in section 4 of the
ANREU Act. [Item 10, section 4, ANREU
Act] [Item 11, section 4, ANREU
Act] This means that existing
provisions for prescribed international units under Part 4 of the
ANREU Act apply to European allowance units. Section 122
of the CE Act provides for eligible international emissions units
(which includes European allowance units as a prescribed
international unit) to be surrendered for compliance under the
carbon pricing mechanism from the 2015-16 financial year.

1.33 Provision has been made to
enable the linking of emissions trading schemes, including to the
EU ETS, in cases where direct (registry-to-registry) linking is not
possible. Specifically this will occur through the issuance
of AIIUs in relation to given international units where certain
criteria have been met. These amendments are discussed in
paragraphs 1.60 to 1.114 below.

Surrender limits on eligible international
emissions units

1.34
A surrender limit on eligible international emissions units was
included in section 123 of the CE Act, to safeguard the
environmental integrity of Australia‘s pollution reduction
efforts. As part of the arrangement to link the carbon
pricing mechanism to the EU ETS, the Government agreed to introduce
an additional limit on the use of eligible Kyoto units. A
12.5 per cent limit on Kyoto units will give effect to
this arrangement and facilitates the convergence of the price of
European allowance units and Australian carbon units.
[Item 79, section 123A, CE
Act] ‘Kyoto unit’ is
defined to have the same meaning as under the ANREU Act.
[Item 38, section 5, CE
Act]

1.35
The ‘general limit’ maintains the existing
50 per cent surrender limit on eligible international
emissions units, operating from financial year 2015-16 to
2019-20. The term ‘general limit’ is used rather
than ‘surrender limit’ as multiple limits on the
surrender of eligible international emissions units may
apply. [Item 81, subsection 133(7E), CE
Act]

1.36
A ‘designated limit’ constrains the number of eligible
international emissions units of a certain class or classes that a
liable entity can surrender in a given financial year. This
designated limit is set as a percentage of a liable entity’s
annual liability; this is known as the ‘designated limit
percentage’. [Item 34, section 5, CE Act] [Item 35,
section 5, CE Act] [Item 79, section 123A, CE
Act]

Example
1.1 Designated limit

Under a designated
limit percentage of 10 per cent, a liable entity with an
annual liability of 100 units may only use 10 units of the unit
class covered by the designated limit.

1.37
The Government may, by regulations, introduce one or more
designated limits on eligible international emissions units other
than Kyoto units. Each designated limit is to be identified
in the regulations by a unique name to enable the application of
ranking provisions regarding the application of designated limits
as set out in the amended section 133 of the CE Act.
[Item 79, subsection 123A(2), CE Act] [Item
81, subsection 133(7C), CE Act] The
setting of designated limits through regulations reflects the
requirement for flexibility in both setting and changing limits
over time, reflecting the maturation of Australia’s emissions
trading arrangements, the enhancement of existing links with
overseas emissions trading schemes and the development of new links
and international emissions trading systems. All regulations
made concerning designated limits are disallowable legislative
instruments for the purposes of the Legislative Instruments Act 2003 to
ensure appropriate parliamentary oversight of changes to market
access to units.

1.38
Designated limits may only apply from the start of the flexible
price period, that is, the 2015-16 financial year, which is the
first year that international units can be surrendered.
[Item 79, subsection 123A(3), CE
Act]

1.39
The regulations for each designated limit will specify the years in
which it is to apply. However, in accordance with the
notice provisions, a limit can come into effect no earlier than one
to three financial years after the the year in which the relevant
regulation is registered. [Item 79, subsections 123A(1)-123A(5), CE
Act] A designated limit may apply for
a limited number of financial years (for example, the financial
years 2015-16, 2016-17 and 2017-18) or indefinitely (for
example, the financial year 2015-16 and each later financial
year). [Item 79, subsection 123A(1), CE
Act]

1.40
The ability to set or amend designated limits on classes of
eligible international emissions units provides the Government with
flexibility to respond to changing international circumstances and
is designed to facilitate future linking with other emissions
trading schemes. For example, the Government may wish to have
designated limits sunset in line with an international agreement
taking effect or change designated limits to enable links with
prospective schemes in the United States of America or the
People’s Republic of China. The Government is also very
conscious of the need for a stable market and investment
environment. The Government is committed to provide at least
three years’ notice before new designated limits are
introduced or changes to existing designated limits are due to take
effect. If it is necessary to facilitate linking with another
emissions trading scheme, then the Government will provide at least
one year’s notice. The notice period is shorter in this
case because providing access to additional unit types is
anticipated to benefit liable entities and support
Australia’s international climate change objectives.
[Item 79, subsection 123A(4), CE Act] [Item
79, subsection 123A(5), CE Act]

1.41
When setting designated limits on the surrender of eligible
international emissions units, the Minister may consider the
following matters: [Item 79, subsection 123A(11), CE
Act]

â¢
Australia’s international objectives and obligations, so as
to ensure that limits are consistent with the efficient and
credible operation of international carbon markets;

â¢
the environmental integrity of the carbon pricing mechanism;

â¢
whether the units are accepted by either the European Union or New
Zealand emissions trading schemes;

â¢
the extent to which the regulations would facilitate linking of the
scheme embodied in the CE Act and the associated provisions with
other emissions trading schemes; and

â¢
such other matters as the Minister considers relevant.

1.42
These considerations mirror the considerations that the Minister
may consider when setting qualitative limits on international units
under the current subsection 123(2) of the CE Act.
However, these criteria are amended such that the Minister now
must consider the
expert recommendations of the Climate Change Authority when
recommending a qualitative restriction or a designated limit.
[Item 76, subsection 123(1A), CE Act]
[Item 77, subsection 123(2), CE Act] [Item 79, subsection
123A(10), CE Act] The Climate Change
Authority must take into account the principles in section 12
of the Climate Change Authority
Act 2011 in providing this advice and is expected to
address the substantive issues involved in a particular restriction
such as the relevant considerations listed above. This
confirms the key role that the Climate Change Authority is expected
to play concerning the environmental integrity of international
units accepted into Australia’s emissions trading scheme.

1.43
The Minister may also take into account an additional
consideration, which is added to both new section 123A(11) of the
CE Act concerning designated limits and the existing section 123(2)
of the CE Act concerning qualitative restrictions, to the effect
that the Minister may consider whether a qualitative limit or a
designated limit facilitates linking. This consideration
draws the Minister’s attention to the importance of ensuring
that any regulations setting quantitative and qualitative limits
would, for example, take account of the Government’s link
between the carbon pricing mechanism and the EU ETS, or such
other emissions trading schemes as it may link with in the
future. [Item 79, subsection 123A(11) CE
Act] [Item 78, subsection 123(2) CE
Act]

1.44
In considering relevant matters, the Minister could consider the
need for any particular transitional arrangements. However,
as international units can be sold into other markets or banked for
future use, the notice period should be sufficient to avoid the
need for additional transitional arrangements.

1.45
The 12.5 per cent designated limit on Kyoto units is
established in legislation through the ‘listed unit
designated limit’. This provides clarity and certainty
about the designated limit for eligible Kyoto units. This
designated limit percentage cannot be changed until the 2020-21
financial year. This encourages a stable investment
environment as it ensures, until 2020, that liable entities use of
Kyoto units will not be further restricted through designated
limits. From the 2020-21 financial year regulations may
change the designated limit percentage for the listed unit
designated limit. [Item 79, section 123A, CE
Act]

Example
1.2 Limits on eligible Kyoto units

A liable entity
with a liability of 1,000 units could surrender up to
125 eligible Kyoto units in a given compliance
year.

1.46
Regulations may broaden the application of this listed unit
designated limit such that it applies to additional classes of
eligible international emissions units, with the exception of
European allowance units or AIIUs issued in relation to European
allowance units. [Item 79, subsection 123A(8), CE Act] [Item
79, subsection 123A(9), CE Act]

Excess surrender
provisions

1.47
In some circumstances a liable entity may surrender too many units
when meeting its liability for a given financial year under the
carbon pricing mechanism. When this occurs, there will be
rules setting out the treatment of units that are surrendered in
excess of a designated limit and/or the general limit on the
surrender of eligible international emissions units.

1.48
The excess surrender provisions are expected to apply only rarely,
as it is not in a liable entity’s interest to surrender units
in excess of the relevant surrender limit. If a liable entity
surrenders units in excess of a limit, it will lose control of the
use to which these units will be put. For this reason, liable
entities would reasonably not be expected to surrender units in
excess of surrender limits. In addition, liable entities are
unlikely to surrender units in advance of knowing their emissions
number for a given financial year.

1.49
When a liable entity surrenders eligible international emissions
units for a given financial year, these units will be tested to see
if there is an ‘unacceptable designated limit
situation’ and/or an ‘unacceptable general limit
situation’. These limits are to be applied
consecutively, with all designated limits to be applied before the
general limit is applied. [Item 81, subsection 133(7B), CE Act] [Item
81, subsection 133(7D), CE Act]

1.50
An unacceptable general limit situation applies when an entity
surrenders more units than is allowed by the general limit, that
is, a liable entity surrenders eligible international emissions
units for more than 50 per cent of its liability.
[Item 81, subsection 133(7E), CE
Act] Similarly, an unacceptable
designated limit situation applies when an entity surrenders units
in excess of that allowed by a given designated limit, for example
if an entity surrenders Kyoto units for more than
12.5 per cent of its liability. [Item 81, subsection 133(7F), CE
Act]

1.51
If an unacceptable designated limit situation applies, and/or if an
unacceptable general limit situation applies, those units covered
by the applicable situation (that is, those units in excess of the
limit) are treated as having not been surrendered in the current
eligible financial year and as having been surrendered for
liabilities in the next eligible financial year. [Item 81, subsection 133(7), CE Act] [Item
81, subsection 133(7A), CE Act]

Example
1.3 Unacceptable general limit situation

If, in December
2016, a liable entity with a carbon pricing liability of 100 units
for 2015-16 surrenders 60 eligible international emissions units
for 2015-16, then 10 of these units are covered by the unacceptable
general limit situation. These units will be treated as
having not been surrendered in 2015-16 and as having been
surrendered for the liable entity’s liability in
2016-17.

1.52
Units must be ordered to determine which units are covered by an
unacceptable designated limit situation or an unacceptable general
limit situation. Units subject to a particular limit will be
ordered according to the time at which they were surrendered.
The most recently surrendered unit will be ranked first, while the
next most recently surrendered will be ranked second and so
on. Those units that have a ranking that is less than or
equal to the number of units that were surrendered in excess of a
given limit are those units that will be covered by the relevant
unacceptable designated limit situation or unacceptable general
limit situation. [Item 81, subsection 133(7E)(e), CE Act]
[Item 81, subsection 133(7F)(f), CE
Act]

Example
1.4 Ranking of units under an unacceptable
situation

If an entity
surrenders a total of three units - one ERU on 1 December,
one CER on 2 December and one EUA on 3 December, for the purposes
of applying the general limit, then the EUA would be ranked first,
the CER ranked second and the ERU ranked
third.

1.53
To enable the ranking of units when more than one unit is
surrendered in a single transaction, the Minister may, through a
disallowable determination, state the order in which units
surrendered in a single transfer are ranked for the purposes of
applying a surrender limit. [Item 81, subsection 133(7G)(a), CE
Act] For example, this may be used to
ensure that firms receive the most advantageous treatment by
ensuring that lower cost unit types are treated as having been
surrendered before higher cost units.

1.54
If a determination is not in force, then units surrendered in a
single transaction will be treated as having been surrendered in
the numerical order of their serial numbers, disregarding any
alphabetical characters included in those serial numbers.
[Item 81, subsection 133(7G)(b), CE
Act]

Example
1.5 Simultaneous surrender

The Regulator will
treat a unit with the serial number ABC123 as having been
surrendered before a unit with the serial number ABC124.
Similarly, the Regulator will treat a unit with the serial number
XYZ234 as having been surrendered before a unit with the serial
number ABC456 or a unit with serial number
12345.

1.55
Surrender limits are to be applied consecutively, with all
designated limits to be applied before the general limit is
applied. [Item 81, subsection 133(7D), CE
Act]

1.56
As more than one designated limit may apply at a given time,
eligible international emissions units may be subject to more than
one unacceptable designated limit situation. In this case,
designated limits will be applied consecutively in an order
determined by a legislative instrument made by the Minister.
This will be a disallowable legislative instrument for the purposes
of the Legislative Instruments
Act 2003 . The order of application of designated
limits can influence which units are treated as excess
surrendered. By providing the Minister the power to determine
the order in which designated limits are applied, the Minister may
apply them in an order that minimises the number of units
considered excess surrendered or to ensure that the surrender of
lower cost international units is maximised. [Item 81, subsection 133(7B), CE
Act]

1.57
If a legislative instrument is not in force, because it has not
been made or has been disallowed, designated limits will be applied
consecutively beginning with the designated limit that has the
smallest designated limit percentage. [Item 81, subsection 133(7B)(b), CE
Act]

Example
1.6 Consecutive application of designated limits
by size

If eligible
international emissions units are subject to designated
limit A of 15 per cent and designated limit B of
10 per cent, then designated limit B will be applied
before designated limit A.

1.58
If there are two or more designated limits that apply, and those
limits have the same designated limit percentage, then the limits
will be applied consecutively based on the alphabetical order of
the unique names of the limits. [Item 81, subsection 133(7C), CE
Act]

If eligible
international emissions units are subject to designated
limit B of 10 per cent and designated limit A of
10 per cent, then designated limit A will be applied
before designated limit B.

1.59
Units found to be in an unacceptable designated limit situation are
treated as if they were surrendered for the next eligible financial
year. As limits are applied consecutively, units found to be
in an unacceptable designated limit situation regarding one
designated limit are not ranked for the purposes of applying
subsequent designated limits or the general limit.
[Item 81, subsection 133(7D), CE Act] [Item
81, subsection 133(7E), CE Act] [Item 81, subsection 133(7F),
CE Act]

Example
1.8 Treatment of units covered by a designated
limit

Take the case
where there are three designated limits, designated limit A applies
a 10 per cent limit to Reforestation units , designated
limit B applies a 10 per cent limit to Afforestation units . Both
Reforestation units and
Afforestation units belong to the
International land sector
units class, which is subject to designated limit C of
15 per cent. Note that the 50 per cent
general limit also applies.

Assume an entity
has a liability of 100 units for the 2015-16 financial year and it
surrenders 15 Afforestation
units on 1 December 2016, 30 European allowance
units on 2 December 2016 and 15 Reforestation units on
3 December 2016. In this case designated limits A, B and
C all apply. Ranking these limits in order from lowest to
highest percentage, this means that designated limits A and B apply
before designated limit C. As designated limits A and B have
the same designated limit percentage, these limits are ranked in
alphabetical order, meaning that designated limit A will be applied
first.

Applying
designated limit A, 5 Reforestation Units will be treated
as not having been surrendered in relation to the 2015-16 financial
year, but will be treated as having been surrendered in the 2016-17
financial year. Applying designated limit B, 5
Afforestation units
will be treated as not having been surrendered in relation to the
2015-16 financial year, but will be treated as having been
surrendered in the 2016-17 financial year. Applying
designated limit C, 5 additional Reforestation units will be treated
as not having been surrendered in relation to the 2015-16 financial
year, but will rather be treated as having been surrendered in the
2016-17 financial year. As the Reforestation units were surrendered
after the Afforestation
units they are the unit captured by the unacceptable
designated limit situation regarding designated limit
C.

Further note that
in this example, the unacceptable general limit situation does not
apply, as after the application of designated limits A, B and C,
only 45 eligible international emissions units are treated as
having been surrendered for the 2015-16 financial year (10
Afforestation units ,
5 Reforestation units
and 30 European allowance units).

Supporting the development of international
emissions trading

1.60
Generally, the Government will seek to implement direct linking
between the carbon pricing mechanism and overseas emissions trading
schemes by means of a direct link between their respective
registries. This would enable the direct transfer of units
from one registry to another, subject to appropriate
safeguards.

1.61
In some circumstances, direct linking may not be possible, either
temporarily or permanently, as a consequence of specific issues
such as potential delays in changing relevant legislation or due to
the design of the electronic registries in which the emissions
units are held. T he ANREU Act provides a
framework for linking when the direct linking of registries is not
possible. This includes provisions for the Regulator to open
and operate a foreign registry account on behalf of the
Commonwealth and provisions for the issuance and transfer of
AIIUs. By providing the Government powers to alter
arrangements through disallowable legislative instruments, the
Government has the necessary capacity to implement specific
arrangements to facilitate linking with other overseas emissions
trading schemes and provide for the specific operating requirements
of those future linking arrangements. In most cases, these
arrangements will be of a highly technical nature, reflecting the
practicalities of linking the Registry with other registries and
specific issues concerning the acceptance of international
emissions units. These regulations will be the subject of
Parliamentary oversight as they will be legislative instruments for
the purposes of the Legislative Instruments Act
2003 and the subject of
disallowance.

1.62
These powers enable the Government to give effect to international
agreements or arrangements for linking. An
‘international arrangement’ is defined in section 4 of
the ANREU Act as an arrangement between Australia and a foreign
government body or an international organisation.
[Item 7, section 4, ANREU
Act] An ‘international
organisation’ is defined in section 4 of the ANREU Act to
cover international organisations such as the European Union and
its constituent bodies, such as the European Commission, and other
international entities that are not sovereign states, but which may
operate emissions trading schemes. [Item 8, section 4, ANREU
Act]

Opening and operating Commonwealth foreign
accounts

1.63
The Commonwealth may open and operate an account in a foreign
registry, known as a ‘Commonwealth foreign registry
account’. [Item 3, section 4, ANREU Act] [Item 27,
subsection 86A(1)(a), 86A(2), ANREU
Act] This power allows the Regulator,
acting on behalf of the Commonwealth, to operate an account in a
foreign registry that may be required to facilitate a link (for
example, to hold or transfer foreign units).

1.64
The Minister may, through a disallowable legislative instrument,
direct the Regulator to open and operate a Commonwealth foreign
registry account on behalf of the Commonwealth. [Item 27, subsection
86A(4)] The power of the Regulator to
apply to open an account in a foreign registry and then operate
that account must only be exercised in accordance with a
ministerial direction, which is appropriate for the operation of a
foreign registry account in the name of the Commonwealth
[Item 27, subsections 86A(4), 86A(5), ANREU
Act] . As the Commonwealth
foreign registry account will operate under the rules of a foreign
registry, any legislative instrument will be consistent with the
relevant rules of the foreign registry.

1.65
The administrator of the foreign registry will ultimately determine
whether the Commonwealth may open and operate an account in the
foreign registry, having regard to the rules and requirements
applicable to its own registry.

1.66
In addition to opening and operating a foreign registry account,
the Commonwealth may do anything incidental to, or ancillary to,
the opening or operation of such an account [Item 27, subsection 86A(1)(b), ANREU
Act] . This recognises that the
Government may need to perform operations, in addition to opening
and operating a foreign registry account, in order to facilitate a
link. For example, this may allow the Commonwealth to open
and operate a trading platform on a foreign registry to obtain
transaction data to support linking arrangements.

Issuance of AIIUs

1.67
Part 4 of the ANREU Act sets out the rules in relation to dealings
with prescribed international units. Amendments will divide
Part 4 of the ANREU Act into three Divisions so as to include
provisions about the issue of AIIUs. [Item 15, section 48, ANREU Act] [Item 16,
section 48, ANREU Act] [Item 17, section 48, ANREU
Act]

1.68
The Regulator may issue AIIUs on behalf of the Commonwealth.
[Item 17, section 48A, ANREU Act] [Item 9,
section 4, ANREU Act] [Item 1, section 4, ANREU Act]
[Item 31, section 5, CE Act]
Amendments include AIIUs in the definition of prescribed
international units under section 4 of the ANREU Act.
[Item 10, section 4, ANREU Act] [Item 11,
section 4, ANREU Act] This means that
AIIUs can be surrendered for compliance under the carbon pricing
mechanism. It also triggers the application of Part 4 of the
ANREU Act which contains general provisions relating to prescribed
international units.

1.69
The issuance process for AIIUs is similar to the process for
issuing carbon units, set out in Part 4, Division 2 of the CE
Act. To hold an AIIU, a person must have a Registry
account. [Item 17, subsection 48C(3),
ANREU Act] The Regulator will issue an
AIIU by making an entry for the unit in an account in the
Registry. [Item 17, subsection 48C(1),
ANREU Act] Each AIIU will have a
unique identification number known as the ‘serial
number’. [Item 17, section 48B, ANREU Act] [Item 17,
subsection 48C(2), ANREU Act)]

1.70
Consistent with the treatment of other types of emissions units
issued under Australian law, AIIUs will be treated as personal
property both generally and for the purposes of certain Australian
laws including the bankruptcy law, corporations law, laws relating
to deceased estates and for other laws as prescribed. If the
transfer of AIIUs is permitted, the protection to good faith
purchasers would be afforded to the purchasers of AIIUs.

1.71
The Regulator must not issue an AIIU unless conditions set out in
regulations are satisfied. [Item 17, subsection 48D(1), ANREU
Act] Conditions on the issuance
of AIIUs must give effect to the principle that an AIIU must not be
issued unless a corresponding foreign emissions unit has been
withdrawn from circulation within a foreign registry.
[Item 17, subsection 48D(2), ANREU
Act] A corresponding foreign emissions
unit means a unit (however described) that is issued outside
Australia. This could include a European allowance
unit. [Item 17, subsection 48D(3),
ANREU Act] To ensure appropriate
parliamentary oversight, these regulations are disallowable.

1.72
It is intended that the Australian income tax treatment of any
AIIUs that are issued in accordance with Regulations made under new
section 48D of the ANREU Act will be consistent with the
income tax treatment applying to similar transactions involving
other eligible international emissions units.

1.73
The issuance provisions establish a principle based framework to
guide the development of indirect linking arrangements while
maintaining appropriate capacity to implement the highly technical
aspects of linking arrangements. For example, the regulations
could provide that an AIIU must be issued if a European allowance
unit has been transferred to, and is held within, a Commonwealth
foreign registry account. The regulations could also provide
for the issue of an AIIU to a person if that person has cancelled a
European allowance unit for a purpose other than meeting
requirements under the EU Directive.

1.74
To ensure that appropriate provision is made for the issue of AIIUs
under the requirements of a potentially wide range of future
linking arrangements, the regulations may make further provision
concerning AIIUs, including requiring a person to notify the
Regulator about a prescribed matter. [Item 17, subsection 48E(2), ANREU
Act] If a person does not comply with
a requirement specified in the regulations, then that person, or a
person who aids or abets in such non-compliance, may be liable to a
civil penalty. [Item 17, subsection 48E(2), ANREU
Act] These regulations are legislative
instruments for the purposes of the Legislative Instruments Act 2003 and
may be disallowed.

Transfer of AIIUs

1.75
Provisions giving effect to transfers of prescribed international
units are set out in new Division 3 of Part 4 of the ANREU Act.

1.76
The Government may, by regulations, modify the provisions of new
Division 3 of Part 4 of the ANREU Act in relation to a specified
class of AIIUs. [Item 18, section 57, ANREU Act] [Item 19,
section 57, ANREU Act]

1.77
If regulations do not specify particular arrangement s for the
transfer of AIIUs, then the general provisions relating to
prescribed international units will apply. For example,
AIIUs, as prescribed international units, would be transferable
within the Registry unless regulations made under new subsection
57(2) of the ANREU Act modify the operation of the domestic
transfer provisions in Part 4, Division 3 of the ANREU Act by
declaring that once issued, AIIUs are not
transferable .

1.78
Modifications may be made to provisions relating to:

â¢
making entries in the Registry for prescribed international
units;

â¢
ownership of prescribed international units;

â¢
transfer of prescribed international units including domestic
transfers and incoming and outgoing international transfers;

â¢
transmission prescribed international units by operation of
laws;

â¢
property rights in relation to prescribed international units;
and

â¢
equitable interests in relation to prescribed international units
including the registration of equitable interests.

1.79
Any modifications under new subsection 57(2) will prevail over the
existing provisions in Part 4, Division 3 of the ANREU Act.

1.80
This regulation-making power provides the Government with necessary
flexibility to implement future international linking arrangements,
which may differ in their nature and scope. This flexibility
is necessary to ensure that the current form of the ANREU Act does
not unduly limit the capacity of Australia to effectively negotiate
future linking arrangements in its best interests and to ensure
that Australia can also implement the operating requirements for
any such future linking arrangements.

1.81
This approach also provides the Government with an efficient way to
modify the rules governing a specific international linking
arrangement to ensure compliance with any requirements under the
relevant international arrangement. Subsequent to an
international agreement, this approach may also expedite access by
liable entities to new types or classes of eligible international
emissions units where a direct link to a foreign registry is not
possible, which would further encourage the development of a deep
and liquid international carbon market.

1.82
Any regulations modifying the operation of the existing provisions
of Part 4, Division 3 of the ANREU Act are legislative instruments
for the purposes of the Legislative Instruments Act 2003 and
may be disallowed. The regulation-making power is limited in
scope to amendments concerning a specified class of AIIUs and does
not apply more generally. Furthermore, if the transfer of
AIIUs is permitted within the Registry, then modifications under
new subsection 57(2) of the ANREU Act will not be required.

Cancellation of AIIUs

1.83
The Regulator must cancel an AIIU held in a person’s Registry
account if the conditions set out in the regulations are
satisfied. [Item 23, section 66A, ANREU
Act] The circumstances set out in
regulations may, for example, include an option to voluntarily
cancel AIIUs. In the case where an indirect link is
preliminary to a direct link, the Government may wish to specify
that AIIUs must be surrendered before a direct link is established
or be cancelled. By providing for conditions to be set out in
regulations, the Government may take account of the specific
requirements for the implementation of differing linking
arrangements over time. These regulations are legislative
instruments for the purposes of the Legislative Instruments Act 2003 and
may be disallowed.

1.84
To cancel a unit, the Regulator must remove the entry for the unit
from the person’s Registry account and set out a record of
each cancellation. [Item 23, subsections 66A(3)-(4), ANREU
Act]

1.85
In the interests of due process, a decision by the Regulator to
cancel an AIIU will be a reviewable decision. [Item 26, section 82, ANREU
Act]

General power of
correction

1.86
Section 21 of the ANREU Act provides that the Regulator may alter
the Registry to ensure compliance with provisions of an
international agreement relating to prescribed international
units. [5]

1.87
This general power of correction is extended to include corrections
necessary to comply with requirements of an ‘international
arrangement’ relating to prescribed international
units. [Item 14, subsection 21(1), ANREU
Act] An ‘international
arrangement’ means an arrangement between Australia and a
foreign government body or an international organisation.
[Item 7, section 4, ANREU
Act] A ‘foreign government
body’ includes foreign governments, sub-national governments
and their authorities and an ‘international
organisation’ includes both bilateral and multilateral
international bodies and groups of international bodies, as well as
the subsidiary bodies through which they work (including
commissions, councils and committees). [Item 6, section 4, ANREU Act] [Item 8,
section 4, ANREU Act] The Regulator
can alter the Registry to comply with linking arrangements that
have been agreed, for example through a protocol or an exchange of
letters. This mirrors the existing approach, such that the
Registry will be corrected if it is inconsistent with the Kyoto
rules.

Relinquishment

1.88
A person may be required to relinquish AIIUs in certain
circumstances. [Item 13, section 4, ANREU
Act] The purpose of the relinquishment
provisions are to ensure that fraudulent conduct relating to AIIUs
(and the international units to which they are linked) is treated
in a similar way to fraudulent conduct relating to other carbon
units. These provisions are based on the comparable
provisions included in Parts 10 and 11 of the CE Act.

1.89
Upon application by the Commonwealth Director of Public
Prosecutions or the Regulator, a court may order a person to
relinquish a specified number of AIIUs if a person is convicted of:
[Item 23, sections 66B-66C, ANREU
Act]

â¢
an offence relating to fraudulent conduct under a specified section
of the Criminal Code [6] ;
or

â¢
an offence relating to a foreign law that corresponds to the
specified sections of the Criminal Code .

1.90
A person must comply with such an order even when the person is not
the registered holder of any AIIUs nor the holder of those units
required to be relinquished. [Item 23, section 66C, ANREU
Act]

1.91
The purpose of these provisions is to ensure that relinquishment
can be required in cases where the fraudulent conduct occurs
overseas, which is particularly important given the basis on which
AIIUs are issued.

1.92
Similar to relinquishment of carbon units, AIIUs are relinquished
by electronic notice transmitted to the Regulator. The notice
must specify, among other things, that the relinquishment relates
to AIIUs and the specific order under which relinquishment is
required. Upon relinquishment, the AIIU is cancelled and the
Regulator must remove the entry from the unit holder’s
Registry account. [Item 23, section 66D, ANREU
Act]

1.93
Regulations may make specific provisions regarding the process of
relinquishment. [Item 23, section 66D, ANREU
Act] This reflects that differing
approaches may be required because AIIUs may be relinquished for
different types of international units, and given the
potential for different classes of AIIU to have different
restrictions on their transfer. The range of these approaches
will depend on the nature and scope of future linking arrangements
entered into by Australia. These regulations are legislative
instruments for the purposes of the Legislative Instruments Act 2003
and may be disallowed.

1.94
If a person required to relinquish AIIUs does not hold a sufficient
number of these units, the person may transfer an equal number of
substitute units, in place of AIIUs, in accordance with the
regulations. Transfer of the substitute units has the effect
as if relinquishment of the AIIUs had occurred. The transfer
is actioned by electronic notice and must specify that the transfer
is instead of the relinquishment of AIIUs. A carbon unit or
an eligible Australian carbon credit unit are considered
substitutes. All other unit types, including Kyoto units, are
not considered substitutes [Item 23, section 66E, ANREU
Act] . Please note that a carbon
unit that is substituted for an AIIU is considered to have been
transferred rather than relinquished. This means that
provisions for relinquished carbon units in Part 11 of the CE Act
do not apply.

1.95
If a person is required to relinquish a particular number of AIIUs
and does not do so before a particular time (that is, the
compliance deadline), then they are liable to pay an administrative
penalty or a late payment penalty. [Item 23, section 66F, ANREU Act] [Item 23,
section 66G, ANREU Act] The
amount of the penalty is the same as the amount of the penalties
for non-compliance with relinquishment requirements under Part 11
of the CE Act. This represents the opportunity cost of buying
an Australian carbon unit.

Table 1.1 Penalties relating
to the relinquishment of AIIUs

Item/New
Section

Description

Administrative
Penalty

Item
23

new section
66F(2)

Administrative penalty - Failure to
relinquish AIIUs at all

Determined
according to the formula in new section 66F(2)

Item
23

new section
66F(4)

Administrative penalty - Failure to
relinquish sufficient units

Determined
according to the formula in new section 66F(4)

Item
23

new section
66

Late payment
penalty - relinquishment

An amount
calculated at the rate of 20 per cent per annum or such
rate as is specified in regulations

1.96
Liability for administrative and late payment penalties is an
automatic consequence of non-compliance and the Regulator has no
discretion about whether the person is liable.

1.97
The Regulator does not have a general power to remit late payment
penalties but must apply specified criteria in determining whether
to remit a late payment penalty, [Item 23, subsection 66G(2), ANREU
Act] namely:

â¢
the person did not contribute to the delay in payment and has taken
reasonable steps to mitigate the causes of the delay; or

â¢
the person contributed to the delay in payment and has taken
reasonable steps to mitigate the causes of the delay and, having
regard to the reasons for the delay, it would be fair and
reasonable to remit some or all of the amount; or

â¢
the Regulator is satisfied that there are special circumstances
that make it reasonable to remit some or all of the
amount.

1.98
In the interests of due process, a decision by the Regulator to
refuse to remit the whole or part of late payment penalty is a
reviewable decision. [Item 26, line 16 at the end of the table, ANREU
Act]

1.99
Late payment penalties are debts due and payable to the
Commonwealth and may be recovered by the Regulator, on the
Commonwealth’s behalf, in a court of competent
jurisdiction. [Item 23, section 66H, ANREU
Act]

1.100
The Regulator may set off penalties for non-compliance with
relinquishment requirements, if the amount owing is of a kind
specified in the regulations. [Item 23, section 66J, ANREU
Act] The Commonwealth must refund an
overpayment of a late payment penalty made by a person [Item 23, section 66K, ANREU
Act] . This effectively allows
for the person and the Commonwealth to net-out money owed. It
is appropriate to specify the types of debts that can be set off in
regulations as the amount may vary according to the debts to be set
off. These are disallowable regulations.

1.101
To maintain the integrity of relinquishment provisions, entering
into ‘schemes’ aimed at ensuring that a body corporate
or trust becomes unable to pay an existing or future liability to
pay an administrative penalty under section 66F (for non-compliance
with a relinquishment requirement in relation to an AIIU) is a
criminal offence. [Item 23, sections 66L-66M, ANREU
Act]

1.102
These provisions are, in substance, closely modelled on sections
275 and 276 the CE Act, which deal with schemes to avoid
payment of an existing or future liability to pay an administrative
penalty under section 212 of the CE Act (for non-compliance with a
relinquishment requirement in relation to a carbon unit).
‘Scheme’ and ‘trust’ have the same
respective meanings as in Part 19 of the CE Act. [Item 23, section 66N, ANREU
Act]

1.103
These provisions are comparable to those which apply to various
taxes. They are aimed at artificial schemes involving, for
instance, ‘asset-stripping’ whereby a
corporation’s assets are moved leaving only liabilities, and
creating a situation where the corporation is forced into
liquidation. By avoiding their liabilities under the CE Act,
such schemes may allow dishonest persons to accrue very large
financial gains. For this reason, the maximum sanction is 10
years’ imprisonment or 10,000 penalty units, or
both.

Civil penalties

1.104
Civil penalty orders are one of a range of measures designed to
encourage compliance with registry rules and
requirements.

1.105
Civil penalty provisions, including ancillary contraventions, will
apply if a person contravenes or aids a contravention of a
requirement relating to AIIUs set out in the regulations
[Item 17, section 48E, ANREU
Act] . Failure to comply with the
regulations may lead to the imposition of a civil penalty.
[Item 17, subsection 48E(4), ANREU
Act]

1.106
Pecuniary penalties for contravention of a civil penalty are set
out in Part 7 of the ANREU Act. Subsection 69(4)(b) provides
that the pecuniary penalty payable by a body corporate must not
exceed 10,000 penalty units for each contravention of a civil
penalty provision. Subsection 69(5)(b) of the ANREU Act
provides that the pecuniary penalty payable by a person other than
a body corporate must not exceed 2,000 penalty units for each
contravention. The maximum levels of civil penalties reflect
the seriousness of the contraventions and represent clear and
strong disincentives for non-compliance. Any civil penalties
provided for in the ANREU Act are maximums and any penalty that may
be imposed by a court will be determined according to the
circumstances of the particular case. The integrity of the
carbon pricing mechanism could be compromised by liable entities or
other market participants acting in a manner that undermines the
linking arrangement.

1.107
In a proceeding for a civil penalty order against a person for
contravention of a requirement relating to AIIUs set out in
regulations, it is not necessary to prove that person’s state
of mind, including the person’s intention, knowledge,
recklessness, negligence or any other state of mind.
[Item 24, section 79, ANREU Act] [Item 25,
section 79, ANREU Act] Implicit in
this is a reasonable expectation that those subject to the
provision will take steps to prevent inadvertent
contraventions. This mirrors the current provisions in
section 79 of the ANREU Act.

Publication of
information

1.108
To promote transparency, the Regulator is to publish information
about prescribed international units, including information about
the issue of AIIUs.

1.109
For each class of prescribed international units, the Regulator
must publish, on its website the total number of each class of
units held in the Registry and other information relating to the
units or their registered holders as specified in the
regulations. [Item 20, section 59A, ANREU
Act] The Regulator must publish this
information as soon as practicable after the end of each
quarter. [Item 20, section 59A, ANREU
Act] ‘Quarter’ means a
period of three months beginning on 1 July, 1 October, 1 January or
1 April of a given year. [Item 12, section 4, ANREU
Act]

1.110
The Regulator must also publish, and keep up-to-date, statements
setting out concise descriptions of the characteristics of European
allowance units and AIIUs [Item 21, section 61, ANREU
Act] . These statements will
assist in providing information to retail investors about emissions
units. No product disclosure statement or prospectus will be
issued by the Commonwealth under the relevant provisions of the
Corporations Act 2001
concerning these units. This approach is consistent with that
taken to other types of emissions units, including eligible
international emissions units. The Regulator must publish the
concise descriptions of European allowance units and AIIUs within
30 days of the commencement of the relevant regulations.
[Item 21, subsections 61(5)-(6), ANREU
Act]

1.111
To promote transparency of the relinquishment process, the
Regulator must publish certain information relating to the
relinquishment of prescribed units. These publication
requirements are either through a requirement to publish the
information on the Information Database or on the Regulator’s
website ( www.cleanenergyregulator.gov.au ).

1.112
If a relinquishment requirement relates to a person in the
Information Database, the Regulator must enter in the Information
Database any requirement to relinquish AIIUs and the number of
units required to be relinquished or substitute units
transferred. [Item 22, section 63B, ANREU
Act] [Item 22, section 63D, ANREU
Act] If the person is not already in
the Information Database, the Regulator must publish the
person’s name, the details of the relinquishment requirement
and the number of relinquished AIIUs (or substitute units
transferred) on its website. [Item 22, section 63E, ANREU Act] [Item 22,
section 63G, ANREU Act]

1.113
The Regulator must enter in the Information Database the
information relating to the number of units relinquished as soon as
practicable after receiving either the relinquishment notice or the
notice of substitute unit transfer. [Item 22, section 63D, ANREU Act] [Item 22,
section 63G, ANREU Act]

1.114
If the relinquishment requirement relates to a person in the
Information Database, the Regulator must enter on the Information
Database any details of unpaid administrative penalties relating to
non-compliance with an AIIU relinquishment requirement [Item 22, section 63C, ANREU
Act] . If the person is not in
the Information Database, the Regulator must publish the name of
the person and the details of the unpaid penalty amount on its
website. [Item 22, section 63F, ANREU
Act]

Removal of the price
floor

1.115
The CE Act and associated acts currently provide for a price floor
(a minimum carbon price) for the financial years 2015-16, 2016-17,
and 2017-18. The price floor would be implemented through a
minimum auction reserve price and a charge on the surrender of
eligible international emissions units.

1.116
The capacity to impose a price floor is removed as part of the
Government’s arrangement to link the carbon pricing mechanism
to the EU ETS. Further details on the price floor, as
originally proposed, are available in the paragraphs 3.83 to 3.88
and paragraph 3.109 of the Explanatory Memorandum to the Clean
Energy Bill 2011. [7]

Removal of surrender charge on eligible
international emissions units

1.117
Section 124 of the CE Act, which introduced the surrender charge on
eligible international emissions units, is repealed, as is the
entire Clean Energy
(International Unit Surrender Charge) Act 2011 .
Section 124 of the CE Act provided for a charge to be imposed by
the Clean Energy (International
Unit Surrender Charge) Act 2011 if an eligible
international emissions unit was surrendered in relation to the
financial years 2015-16, 2016-17, or 2017-18. [Item 80, section 124, CE Act] [Item 107,
CE (IUSC) Act]

1.118
The Simplified Outline of Part 6 of the CE Act is amended to remove
reference to the charge for the surrender of international
units. [Item 73, section 121, CE
Act] [Item 74, section 121, CE Act] [Item 75, section
121, CE Act]

1.123
The Minister may establish a ‘reserve charge amount’
through a Ministerial determination for a specified auction.
The Minister may establish a means to calculate a reserve charge
amount in relation to the specified auction. This
determination is a legislative instrument for the purposes of the
Legislative Instruments Act
2003 and is a disallowable instrument. Specifying
a calculation for the reserve charge amount in a determination
would provide market participants certainty regarding the method of
determining future auction reserve charges. [Item 67, subsection 111(6), CE Act] [Item
3, subsection 8(4), CE (Charges-Excise) Act] [Item 3,
subsection 8(4), CE (Charges-Customs) Act] [Item 4,
subsection 8(4), 10, CE (Unit Issue Charge-Auctions)
Act]

1.124
Under section 113 of the CE Act the Minister may establish the
policies, procedures and rules for auctioning through a
determination. The scope of the Minister’s power to
make this determination is modified to reflect the changes to the
arrangements for relinquished units (see paragraphs 1.88 to 1.103
above). [Item 69, subsection 113(2)(m),
CE Act] [Item 70, subsection 113(2)(r), CE Act] [Item
71, subsection 113(2)(r), CE Act] [Item 72, subsection
113(2)(s), CE Act]

1.125
The ‘auction reserve charge amount’ is a mechanism
aimed at enhancing the price discovery of the auction. A
reserve charge amount can serve to counteract bid shading (that is,
bidding an amount which is less than the amount that the
participant believes that the unit is worth) or collusion by
auction participants by minimising the potential gains from such
behaviour. When there is a secondary market for carbon units,
the reserve charge will ensure that the clearing price of the
auction does not significantly diverge from the secondary market
price.

1.126
In February 2012, the Department of Climate Change and Energy
Efficiency published a ‘ Position paper on the legislative instrument
for auctioning carbon units in Australia’s carbon pricing
mechanism ’ [8] .
The paper proposed that an ascending clock auction format be
used. For an ascending clock auction, the reserve charge
would typically also represent the first price for which bidders
can indicate their demand, the starting price. A starting
price will improve the speed and efficiency of the auction.

1.129
The use of eligible international emissions units up to the
designated limits can lead to a liable entity having a cost of
compliance that is lower than the price of carbon units.

1.130
Under the existing provisions of relevant Acts in the Clean Energy
Legislative Package, [9]
the equivalent carbon price that applied to liquid fuels and
synthetic greenhouse gases was to be determined by reference to the
price of carbon units sold at domestic auctions. For synthetic greenhouse gases the
Regulator would use the benchmark average auction charge to
calculate the equivalent carbon price. For liquid fuels the
Regulator would use the auction results for the six months ending
on 31 May and the six months ending 30 November to calculate the
equivalent carbon price. [Item 2, section 4, ANREU
Act]

1.131
The equivalent carbon price that now applies to synthetic
greenhouse gases and liquid fuels provides a more accurate
estimate of the cost of
compliance faced by liable entities under the carbon pricing
mechanism, taking into account links with other international
schemes, including the EU ETS. This equivalent carbon price
is now known as the ‘per-tonne carbon price
equivalent’. [Item 40, section 5, CE Act] [Item 86,
section 196A, CE Act]

Per-tonne carbon price
equivalent

1.132
The Regulator will calculate the per-tonne carbon price equivalent
based on a weighted average of prices for domestic units and
international units. Specifically, the weighted average of
domestic units will reflect the six-monthly auction results, and
the weighted average of international units will reflect the sum of
the reference prices for eligible international emissions units
subject to a designated limit.

Example
1.9 Calculation of the Per-tonne carbon price
equivalent

If the reference price for Kyoto units is $11,
with a designated limit of 12.5 per cent, and if the six
month average auction price is $13 then t he per-tonne carbon
price equivalent will therefore be equal to
($11 Ã 12.5%) + ($13 Ã (1 -
12.5%)), which is $12.75 .

1.133
To ensure clarity and consistency in the calculation of the
per-tonne carbon price equivalent and to provide certainty to
affected entities, the Minister may determine the approach that the
Regulator is to take when determining reference prices for
prescribed classes of international units subject to a designated
limit through a Ministerial determination. This determination
is a legislative instrument for the purposes of the Legislative Instruments Act 2003 and
is a disallowable instrument. This will allow the Minister to
set an appropriate reference price for different unit types.
For example, these reference prices may need to account for trade
in units across different exchanges and the proportion of units
traded on and off exchanges.

1.134
The Regulator must publish the per-tonne carbon price equivalent
for a designated six month period (which ends on 31 May or 30
November, starting on 31 May 2015) within seven business days after
the end of each. designated six month period.
[Item 86, subsection 196A(1), CE
Act]

The average carbon unit auction price for a six
month period

1.135
From May 2015 onwards, the Regulator must publish the
‘average carbon unit auction price’. This price
is the average price for auctions of carbon units for the previous
six month period, ending at the end of May or the end of November
respectively. This must occur within seven business days of
May 31, and within seven business days of November 30.
[Item 32, section 5, CE Act] [Item 82,
subsections 196(1AA)-(1AB), CE Act] [Item 83, subsection
196(1), CE Act] [Item 84, subsection 196(1A), CE Act]
[Item 85, subsection 196(2A), CE
Act]

1.136
The average carbon unit auction price for the six month period
ending at the end of May 2015 will be calculated using the auction
results from the previous 11 months. This is to ensure that
if no auctions take place in the six months prior to May 2015 the
average carbon unit auction price can still be calculated.
[Item 82, subsections 196(1AA)-(1AB), CE
Act]

Reference prices

1.137
If a designated limit applies to a particular class of eligible
international emissions units for a particular financial year, then
from 31 May 2015, the Regulator must declare a
reference price for
the class of units within seven days after 31 May and after 30
November of that financial year. [Item 86, subsection 196A(5), CE
Act]

1.138
To ensure clarity and consistency in the calculation of the
reference price and to provide certainty to affected entities, the
Minister may determine, by a legislative instrument, the method
used by the Regulator to make such a declaration.
[Item 86, subsection 196A(6), CE
Act] This determination is a
legislative instrument for the purposes of the Legislative Instruments Act 2003
and is a disallowable instrument. In making such a
determination, the Minister must have regard to prices paid for
eligible international units that are in that class, and such other
matters (if any) that they consider to be relevant.
[Item 86, subsection 196A(7), CE
Act] For example, these reference
prices may need account for trade in units across multiple
different exchanges and the proportion of units traded on and off
exchanges.

1.139
The declaration of a reference price by the Regulator must comply
with such a determination, and be published on the
Regulator’s website. [Item 86, subsections 196A(8)-196A(9), CE
Act]

1.140
The declaration of a reference price by the Regulator is not a
legislative instrument for the purposes of the Legislative Instruments Act
2003 . [Item 86, subsection 196A(10), CE
Act] The declaration is not of a
legislative character and is therefore not within the meaning of
section 5 of the Legislative
Instruments Act 2003 . This provision is included
to assist readers and indicate that an exemption from the
Legislative Instruments Act
2003 is neither sought nor required.

1.141
The adjusted reference
price for a class of units that has a designated limit
is the product of the reference price for the class of units with
the designated limit percentage for that class of units.
[Item 86, subsection 196A(11), CE
Act]

Basic rule for calculating the per-tonne carbon
price equivalent

1.142
The per-tonne carbon price equivalent, for a designated six month
period, is defined by the equation below, and worked out to two
decimal places (rounding up if the third decimal place is 5 or
more). [Item 86, subsection 196A(2), CE
Act]

where:

·
the total of adjusted reference
prices is the sum of the adjusted reference prices for
that six month period - it is in effect the weighted sum of
the reference prices, weighted by the corresponding designated
limit percentages;

·
the total of the designated
limit percentages is the sum of the designated limit
percentages for classes of eligible emissions units that are
subject to designated limit percentages in the financial year in
which the designated six month period ends; and

·
the average carbon unit auction
price is the average carbon unit auction price for the
six month period that is specified in section 196 of the CE
Act.

Modifications to the basic rule for calculating
the per-tonne carbon price equivalent

1.144
The calculation of a per-tonne carbon price equivalent will take
into account the possibility that one or more reference prices are
higher than the average auction price, and the possibility that no
legislative instruments are in force for determining reference
prices.

1.145
If the number worked out under the basic rule for calculating the
per-tonne carbon price equivalent is greater than the average
carbon unit auction price, the per-tonne carbon price equivalent is
equal to the average carbon unit auction price. [Item 86, subsection 196A(4), CE
Act]

1.146
If there is no legislative instrument in force to specify the
method used by the Regulator to declare a reference price, the
per-tonne carbon price equivalent is equal to the average carbon
unit auction price. [Item 86, subsection 196A(4), CE
Act]

1.147
If there is a reference price for a class of eligible international
emissions units that is greater than the average carbon unit
auction price, then the basic rule for calculating the per-tonne
carbon price equivalent is modified in the following way. The
adjusted reference price for that class is disregarded when
calculating the total of
adjusted reference prices ; and the designated limit
percentage for that class is disregarded when calculating the
total of designated limit
percentages . [Item 86, subsection 196A(12), CE
Act] This is equivalent to setting the
reference price for that class to be the average carbon unit
auction price. This provision reflects that if the price for
a class of eligible international emissions units is higher than
the price of carbon units, they are unlikely to be used.

1.148
The basic rule is also modified in the event that new designated
limits are made, for which the limit applies to a class of units
that is contained within another class of units for which a
different designated limit applies.

1.149
If there is a class of eligible international emissions units
subject to a designated limit for a particular financial year; and
there is a class of eligible international emissions units that is
included in the original class and that is subject to a smaller
designated limit percentage, then the designated limit percentage
for that class is disregarded when calculating the total of designated limit
percentages . [Item 86, subsection 196A(13), CE
Act]

1.150
If a class of eligible international emissions units is subject to
a designated limit for a particular financial year, and there is a
class of eligible international emissions units that is included in
the original class and that is subject to a smaller designated
limit percentage, and the reference price for that class is
greater than or equal
to the reference price for the original class, the
adjusted reference price for the class subject to the smaller
designated limit percentage is disregarded when calculating the
total of adjusted reference
prices . [Item 86, subsection 196A(14), CE
Act] This reflects that in this
circumstance, liable entities would prefer not to purchase units
that are in the smaller class, because they would be more
expensive.

Example
1.10 Example where the reference price is
disregarded

There are
international emissions units called Reforestation units with a
designated limit of 5 per cent. Units in this class
are also International land
sector units , which have a designated limit of
12.5 per cent, the reference price for Reforestation units is $15, the
reference price for International land sector units is
$10 and the average carbon unit auction price is
$20.

In this situation,
subsection 196A(13) of the CE Act specifies that the
designated limit of 5 per cent for Reforestation units is disregarded
when calculating the total of designated limit percentages, so the
total of designated limit percentages is
12.5 per cent. Subsection 196A(14) of the CE Act
specifies that because the price of Reforestation units is greater than
the price of International land
sector units , the adjusted reference price for
Reforestation units
is disregarded when calculating the total of adjusted reference
prices.

If there are no
other designated limits, the total of adjusted reference prices
will be equal to $1.25 ($1.25 = $10 Ã 12.5%); the total of
designated limit percentages will be equal to
12.5 per cent; and the per-tonne carbon price equivalent
will therefore be equal to $1.25 + (100% - 12.5%) Ã $20,
which is $18.75.

1.151
If a class of eligible international emissions units is subject to
a designated limit for a particular financial year, and there are
one or more classes of eligible international emissions units
subject to a smaller designated limit, which are contained in the
original class, and for which the reference prices are
less than the reference price for the original class, the
adjusted reference price for the original class would be given by:
[Item 86, subsection 196A(15), CE
Act]

Where:

·
the reference price for
principal class refers to the reference price of the
original class of eligible international emissions units for the
designated six month period;

·
the designated limit percentage
for principal class is the designated limit percentage
for the original class; of eligible international emissions units;
and

·
the total of designated limit
percentages for secondary classes is the sum of the
designated limit percentages for each class contained in the
original class that has a reference price that is less than the
reference price for the principal class.

Example
1.11 Calculation of per-tonne carbon price
equivalent

There are
international emissions units called Reforestation units , which have a
designated limit of 5 per cent; and there are
international emissions units called Afforestation units , which have a
designated limit of 2.5 per cent. Units in these
classes are also International
land sector units , which have a designated limit of
12.5 per cent and that the reference price for
Reforestation units
is $8; the reference price for Afforestation units is $5; the
reference price for International land sector units is
$10; and the average carbon unit auction price is $20. There
are no other designated limits.

In this situation,
subsection 196A(13) of the CE Act specifies that the
designated limit of 5 per cent for Reforestation units is disregarded
when calculating the total of designated limit percentages; and the
designated limit of 2.5 per cent for Afforestation units is disregarded
when calculating the total of designated limit percentages.
The total of designated limit percentages is
12.5 per cent.

Subsection
196A(15) of the CE Act specifies that because the price of
Afforestation units
and Reforestation
units is less than the price of International land sector units , the
adjusted reference price for International land sector units is
$10 Ã (12.5% - (5%+2.5%)), which is $0.50. The adjusted
reference price for Afforestation units is $0.125
($5Ã2.5%) and the adjusted reference price for
Reforestation units
is $0.40 ($8Ã5%). The total of adjusted reference
prices will be equal to $1.025.

The per-tonne
carbon price equivalent will therefore be equal to $1.025 +
(100% - 12.5%) Ã $20, which is $18.53, due to
rounding.

How classes of eligible international units are
defined

1.152 Eligible international
emissions units will be divided into classes for the purposes for
calculating the per-tonne carbon price equivalent. Listed
units, as defined under 123A(10) of the CE Act, will form one
class. [Item 86, section 196A (17), CE
Act] Other classes will be established by regulations made for
the purposes of subsection 123A(1) of the CE Act. [Item 86, section
196A (18), CE Act]

How the per-tonne carbon price equivalent is
used

1.153 The per-tonne carbon
price equivalent applied to synthetic greenhouse gases will be the
most recently published (under section 196A of the CE Act) before
the start of the quarter in which the manufacture or import of the
synthetic greenhouse gas occurs. This will ensure that the
per-tonne carbon price equivalent applied to synthetic greenhouse gases is consistent
with compliance costs of liable entities under the carbon pricing
mechanism with linking arrangements. [Items 1-4, section(2A), (3A), and (4A), SGG
(Import Levy) Act] [Items 1-3, section (2A), (3A), SGG
(Manufacture Levy) Act]

Outline of chapter

2.1
Chapter 2 explains the other technical amendments to the CE Act and
the NGER Act, including:

â¢
amendments to the CE Act concerning the streamlining of the
processes relating to the advance auctions of carbon units and
relinquishment of carbon units;

â¢ technical amendments
to the NGER Act to provide the Minister with the power to determine
methods to measure amounts of designated fuels and methods to
adjust liabilities relating to potential greenhouse gas
emissions;

â¢ amendments to
the CE Act permitting regulations to be made to determine
how specific circumstances relating to the supply and use
of natural
gas are treated under CE Act; and

â¢
a minor amendment to the provisions of the CE Act concerning the
eligibility test for the Opt-in Scheme to expressly include GST
joint venture operators as well as GST joint venture
participants.

Context of amendments

Advance auctions of carbon
units

2.2
Under Part 4 of the CE Act, the Regulator may auction carbon units
before the first year for which they can be surrendered (that is,
their vintage year). These auctions are known as
‘advance auctions’.

2.3
The amount of carbon units that can be advance auctioned is
currently limited to a maximum of 15 million carbon units for each
vintage per year, where the auction occurs more than 6 months
before the beginning of the relevant vintage year and there is no
carbon pollution cap number for that year. This limit
prevents the advance auctioning of a large number of units which
could reduce the Government’s capacity to set future carbon
pollution cap levels.

2.4
This limit is increased to 40 million units for carbon units whose
vintage is 2015-16 that are auctioned in 2013-14; and 20 million
units for other advance auctions where there is no carbon pollution
cap number for that year. The new limit will ensure that
liable entities have access to sufficient quantities of carbon
units to enable risk management through forward contracting.
It avoids the risk auctions are delayed because of the disallowance
period applicable to pollution caps.

Changes to the treatment of relinquished carbon
units

2.5
Parts 7, 10 and 11 of the CE Act provide that carbon units may be
relinquished voluntarily, or as a result of a court order to
relinquish units. The rules concerning relinquishment are to
be streamlined, so that the current requirement that relinquished
units be transferred to a ‘Commonwealth relinquished units
account’ is removed and those units will instead be
cancelled, and a new unit issued by the Regulator in their
place.

Amendments relating to measuring and adjusting amounts
of designated fuels for the purpose of ascertaining potential
greenhouse gas emissions

2.6
Section 7B of the NGER Act defines potential greenhouse gas
emissions embodied in an amount of designated fuel, including
natural gas and taxable fuel. [10]
‘Potential greenhouse gas emissions’ are used to assign
liability for emissions, before they are produced, relating to
natural gas and fuels covered under the carbon price opt-in
scheme.

2.7
Section 7B of the NGER Act gives the Minister power to determine
methods for ascertaining the potential greenhouse gas emissions
embodied in an amount of designated fuel. Subsection 10(3) of
the NGER Act gives the Minister power to determine methods to
measure amounts of emissions, energy consumption and energy
production.

2.8
The amendments enable the Minister to adjust the liability
resulting from potential greenhouse gas emissions embodied in an
amount of designated fuel to account for discrepancies in the
calculation of liability in the previous eligible financial
year.

Changes to the treatment of some natural gas supply and use
arrangements

2.9
The natural gas industry involves a complex array of supply
arrangements which can change over time. Currently, the
natural gas provisions cater for the vast majority of supply
arrangements in use. In order for the carbon pricing
mechanism to maintain effective and complete coverage of natural
gas, a power will be included in the CE Act to allow regulations to
be made to provide for coverage of alternative natural gas
arrangements. This will help maintain competitive neutrality
by supporting the complete coverage of natural gas under the carbon
pricing mechanism over time.

2.10
Part 3, Division 2 of the CE Act provides for liability for
natural gas emissions to apply to a person who is a liable entity
for a facility where gas is used. Part 3, Division 3 of the
CE Act provides for liability to arise for a natural gas supplier
when they supply natural gas to a person and the natural gas is
withdrawn from a natural gas supply pipeline for use. It also
enables the Obligation Transfer Number (OTN) to apportion liability
between suppliers and end users.

2.11
Where the existing provisions in Part 3, Division 2 or Part 3,
Division 3 of the CE Act do not apply, regulations may set out
specific circumstances in which liability would arise for a
supplier or end user of natural gas. ‘Own-use
notifications’ and ‘follow-up notifications’ are
mechanisms intended to enable suppliers to identify when the gas
they supply is applied to a person’s use. This will
allow suppliers to determine where liability applies.
Regulations may modify the definition of supply for the purpose of
the new provisions and determine when supply occurs to facilitate
their application.

2.12
These provisions are intended to apply to specific commercial
arrangements in the natural gas sector. In general, they are
not intended to cover natural gas used at large gas consuming
facilities as liability would ultimately arise from the direct
emitter provisions. Furthermore, the amendments are not
intended to apply to small end users, such as households, as they
obtain gas through generic supply arrangements which give rise to
liability for a supplier under section 33 of the CE
Act.

Changes to the Opt-in Scheme eligibility
test

2.13
Under the Opt-in Scheme, a designated opt-in person must pass the
eligibility test in respect of each acquisition, manufacture or
import of fuel in order to be liable for the potential emissions
embodied in the fuel. The eligibility test for GST joint
venture participants is extended to also include GST joint venture
operators.

Summary of new law

2.14
The limit on advance auctioned units under section 101 of the
CE Act is increased to 40 million units for carbon units whose
vintage is 2015-16 that are auctioned in 2013-14; and 20 million
units for other advance auctions where there is no carbon pollution
cap number for that year.

2.15
The Regulator must not auction units more than three years in
advance of their vintage.

2.16
Relinquished carbon units will be cancelled and a new carbon unit
will be auctioned in its place.

2.17
The Minister, from 1 July 2013, may adjust the liability
resulting from potential greenhouse gas emissions embodied in an
amount of designated fuel. These adjustments are designed to
account for discrepancies in the calculation of liability in the
previous eligible financial year which are the result of
complexities in the market arrangements for designated fuels.

2.18
The Government may set out, through regulations, the specific
circumstance in which liability would arise for a supplier or end
user of natural gas where the use of the natural gas is not already
covered by Part 3, Division 2 or Part 3, Division 3 of
the CE Act.

Comparison of key features of new law and
current law

New
Law

Current
Law

Advance auctions of carbon
units

No more than 20
million carbon units will be auctioned in a financial year before
their vintage year if no carbon pollution cap has been set for that
vintage year.

However, in
2013-14, up to 40 million carbon units of the 2015-16 vintage can
be auctioned if no carbon pollution cap has been set for
2015-16.

The Regulator may
only auction units of a particular vintage, if the year in which
the auction occurs is within 36 months of the relevant vintage
year

No more than 15
million carbon units are to be auctioned in a financial year before
their vintage year if no carbon pollution cap has been set for that
vintage year.

Changes to the treatment of
relinquished carbon units

If a carbon unit
is relinquished, it is cancelled. If its vintage year is a
flexible charge year, a new carbon unit will be issued by the
Regulator.

If a relinquished
carbon unit has a vintage year that is a flexible charge year, then
it is transferred to the Commonwealth relinquished units
account. There would be secondary market auctions of
relinquished carbon units.

Amendments to the NGER
Act

The Minister's
determination making power is extended to include methods for
measuring fuels for the purposes of ascertaining potential
greenhouse gas emissions. In addition, the Minister may
determine a method for adjusting a person’s PEN relating to
potential greenhouse gas emissions.

The Minister may
determine, by legislative instrument, methods to measure and
ascertain greenhouse gas emissions, energy consumption and
production and emission reductions, removals and
offsets.

An executive
officer of the corporation making the application may sign-off on
applications for registration and reporting transfer
certificates.

Applications for
registration and reporting transfer certificates must have approval
from the chief executive officer of the corporation making the
application.

Changes to the treatment of some natural gas
supply and use arrangements

Regulations may
set out the circumstances in which liability applies to a natural
gas end user or natural gas supplier where natural gas is used and
the use is not covered by the existing direct emitter or natural
gas supply provisions.

Liability arises
under the natural gas supply provisions where natural gas is
supplied and it is withdrawn from a natural gas supply pipeline for
use. Alternatively it can arise where it counts towards a
facility’s direct emissions.

Liability can
apply to a natural gas supplier, a person who is a liable entity
for a large gas consuming facility or a person who quotes the
person’s OTN for natural gas supplied to them, where the OTN
quotation is accepted by the supplier.

The Opt-in Scheme eligibility
test

The eligibility
test that must be passed for a designated opt-in person to be
liable for the potential emissions embodied in an amount of fuel
includes both GST joint venture participants and GST joint venture
operators.

The eligibility
test that must be passed for a designated opt-in person to be
liable for the potential emissions embodied in an amount of fuel is
limited to GST joint venture participants.

Detailed explanation of new
law

Preliminaries

2.19
Schedule 1, Parts 1 and 3, which make general amendments to the
ANREU Act and the CE Act, will commence on the day after the bill
receives the Royal Assent. [Clause 2, Clean Energy Amendment (International
Emissions Trading and Other Measures) Bill
2012]

2.20 Schedule 1, Part 2,
of the bill which makes amendments relating to fuel to the CE Act
and the NGER Act, will commence on 1 July 2013. The
amendments to the NGER Act made by this Part apply to reports
relating to the 2012-13 financial year and all subsequent
years. [Clause 2, Clean Energy Amendment (International
Emissions Trading and Other Measures) Bill
2012]

â¢
up to 40 million units of the 2015-16 vintage in 2013-14, if no
carbon pollution cap is in place for 2015-16; and

â¢
up to 20 million carbon units of a particular vintage before their
vintage year, if no carbon pollution cap is in place for that
vintage year.

2.22
The Regulator may not auction units of a particular vintage,
unless the year in which the auction occurs is within 36 months of
the relevant vintage year. [Item 61, section 101, CE
Act]

Changes to the treatment of relinquished carbon
units

2.23
As relinquished carbon units will be cancelled rather than
auctioned, section 112 of the CE Act, which provides for auctions
of relinquished carbon units, is repealed. [Item 68, section 112, CE
Act] References to section 112 of the
CE Act are no longer required and are removed from section 113(2)
and subsection 102(3) of the CE Act. [Item 65, section 102, CE Act] [Items
69-72, section 113, CE Act] As it is
no longer required, there will no longer be a Commonwealth
relinquished units account. [Item 33, section 5, CE
Act]

2.24
All relinquished units will be cancelled. Relinquished carbon
units with a flexible charge vintage year will be cancelled and a
new carbon unit will be subsequently auctioned in its place.
[Item 87, section 210, CE
Act]

2.25
To ensure that carbon unit supply is not affected by changes to the
treatment of relinquished units, section 102 of the CE Act is
amended so that the total number of carbon units issued by the
Regulator takes into account the number of relinquished
units. [Item 62, section 102, CE
Act] [Item 63, section 102, CE Act] [Item 64, section
102, CE Act]

2.26
In particular, the number of carbon units with a particular vintage
year that are issued by the Regulator will be equal to the total
of: [Item 62, section 102, CE
Act] [Item 63, section 102, CE Act] [Item 64, section
102, CE Act]

â¢
the carbon pollution cap number for that year;

â¢
the total number of carbon units with the corresponding vintage
year that were relinquished before the start of the relevant
vintage year; and

â¢
the total number of carbon units with the relevant vintage year or
an earlier vintage year that were relinquished during the relevant
vintage year.

2.27
This approach ensures that if a carbon unit is relinquished, a new
carbon unit will be issued, even if there will be no further
auctions corresponding to the vintage year of that carbon unit.

2.28
Complex commercial arrangements in markets for designated fuels can
lead to difficulties in measuring amounts of fuel and therefore
ascertaining potential greenhouse gas emissions embodied in an
amount of fuel. Specifically:

â¢
In the natural gas market there are time delays associated with the
incorporation of natural gas supply meter readings into financial
accounts. This delay means that reconciliation of accounts
and meters are often required. These reconciliations may
occur sometime after supply takes place.

â¢
A key component of determining opt-in eligibility for taxable fuels
is the entity’s entitlement to a fuel tax credit for fuel
acquisition, manufacture or import. Entitlement to a fuel tax
credit is affected by the sector in which the fuel is used.
This creates complexities where the fuel is not used (or the type
of use is not known) until the following eligible financial
year.

2.29
To account for these commercial complexities, the Minister’s
power to determine, by disallowable legislative instrument, the
methods for measuring amounts of emissions and energy is expanded
to include the capacity to determine methods for measuring fuels
for the purposes of ascertaining potential greenhouse gas
emissions. Additionally, the Minister has the power to
determine adjustments to a person’s ‘provisional
emissions number’ (PEN) relating to potential greenhouse gas
emissions. The purpose of the original determination-making
power, and these amendments is to ensure the transparency,
comparability, accuracy and completeness of reporting under the
National Greenhouse and Energy Reporting System.

2.30
Under section 10 of the NGER Act, the Minister may determine
methods, or criteria for methods, for measuring amounts of
designated fuel for the purposes of ascertaining potential
greenhouse gas emissions. This includes the capacity to
determine methods for measuring natural gas, taxable fuel,
liquefied natural gas, or liquefied petroleum gas. This means
that the Minister can include measurement methods in the
National Greenhouse and Energy
Reporting (Measurement) Determination 2008 for natural
gas and opt-in scheme fuels to quantify potential greenhouse gas
emissions. The Minister may also determine that different
measurement criteria apply under different circumstances.In keeping
with existing determinations under section 10 of the NGER Act, this
determination is a legislative instrument for the purposes of the
Legislative Instruments Act
2003 and is a disallowable instrument.
[Item 104, section 10, NGER Act] [Item 105,
subsection 10(5), NGER Act]

2.31
The Minister may also determine adjustments to a person’s
PEN, where that PEN results from a provision under Divisions 3 or
3A of Part 3 of the CE Act or in the Opt-in Scheme. [11]

2.32
Where a person’s PEN in the previous eligible financial year
is found to exceed the actual PEN for that year, if for example due
to full activity data not being available, the PEN in the current
eligible financial year may be reduced to reflect the previous
year’s discrepancy. Reductions to a person’s PEN
can only occur where conditions specified in the determination are
satisfied and where the person’s PEN reported in the previous
eligible financial year was less than the actual PEN resulting from
the actual amount of designated fuel supplied, acquired,
manufactured or imported in that year. [Item 105, subsection 10(6), NGER
Act]

2.33 Similarly, where a
person’s PEN in the previous eligible financial year is found
to be less than the actual PEN for that year, if for example due to
full activity data not being available, the PEN in the current
eligible financial year may be increased to reflect the
previous year's discrepancy. Increases
to a person’s PEN can only occur where conditions specified
in the determination are satisfied and where the person’s PEN
reported in the previous eligible financial year was greater than
the actual PEN resulting from the actual amount of designated fuel
supplied, acquired, manufactured or imported in that year.
[Item 105, subsection 10(8), NGER
Act]

2.34
The power to adjust PENs is limited as for both positive and
negative adjustments to a person’s PEN; the adjustment cannot
be more than the amount of the discrepancy in the previous eligible
financial year. The intent is to allow persons in situations
that satisfy the conditions specified in the determination to
reconcile fuel amounts between eligible financial years and
not be subject to a shortfall charge. [Item 105, subsections 10(7)-10(9), NGER
Act]

Example
2.1 Indicative example of how a PEN may be
adjusted

In 2013-14 a
natural gas supplier (IVY Corp) reported its PEN to be 50,000,
based on the methods included in the Minister's Determination for
measuring the amount of natural gas supplied. In 2014-15 IVY
Corp ascertains that its 2013-14 PEN is 55,000 based on the amount
of natural gas actually supplied. IVY Corp calculates its
2014-15 unadjusted PEN to be 60,000. Once adjusted, IVY
Corp's 2014-15 PEN is 65,000, noting that the details regarding
adjustment will be set out in the Minister’s
Determination.

2.35
To facilitate these adjustments, the definition of
‘provisional emission number’ has been amended in
section 5 of the CE Act to refer to the adjustment provisions
included in the amended NGER Act. [Item 96, section 5, CE
Act]

2.37
The amendments to sections 7 and 10 of the NGER Act apply from 1
July 2013. Therefore, no adjustments are possible for PENs,
preliminary emission numbers or interim emission numbers that
relate to the 2012-13 eligible financial year. [Item 106, timing of application of amendments,
NGER Act]

Changes to application signoff under the NGER
Act

2.38
Currently, applications for registration and reporting transfer
certificates must have approval from the chief executive officer of
the corporation making the application. This requirement is
altered to provide that approval from an executive officer of the
corporation is sufficient for the purposes of registration and
reporting transfers. An ‘executive officer’ is
defined in section 7 of the NGER Act to include a broader category
of senior officers of a body corporate, including directors, the
chief financial officer and the secretary of a body
corporate. Allowing an executive officer to sign-off on
applications for registration and reporting transfers, streamlines
the application process and aligns corporate sign off with other
parts of the National Greenhouse and Energy Reporting System.
[Item 94, subsection 12(3), NGER Act] [Item
95, subsection 12K(5)(d)(iii), NGER Act] [Section 2, Clean
Energy Amendment (International Emissions Trading and Other
Measures) Bill 2012]

Changes to the treatment of some natural gas supply and use
arrangements

2.39
Currently, liability arises under Part 3, Division 3 of the CE
Act, where natural gas is supplied and it is withdrawn from a
natural gas supply pipeline for use. Alternatively liability
can arise where emissions from the use of natural gas count towards
a facility’s direct emissions under Part 3, Division 2
of the CE Act. Liability can apply to a natural gas supplier,
a person who is a liable entity for a large gas consuming facility
or a person who quotes the person’s OTN for natural gas
supplied to them, where the OTN quotation is accepted by the
supplier.

2.40
Currently, there is the potential for certain commercial
arrangements to lead to situations which may not be captured by the
current provisions of the CE Act concerning emissions embodied in
natural gas. Regulations may set out the circumstances in
which liability applies to a supplier or end user in specific
circumstances, enabling the Government to maintain competitive
neutrality across the industry by supporting the complete coverage
of natural gas under the carbon pricing mechanism. The
specific provisions would be consistent with the current natural
gas provisions in that liability would arise where the use of the
natural gas results in greenhouse gas emissions. These
specific regulations would refect the commercial arrangements in
place from time to time, ensuring that the maximum amount of
natural gas is covered by the carbon pricing mechanism, consistent
with the principle that all emissions embodied in natural gas
should be covered, and opportunities to develop new commercial
arrangements to avoid liability are minimised. Please note
that the amendments concerning the treatment of natural gas do not
take effect unless necessary regulations are made and the
Government would consult on the development of any such regulations
prior to their being recommended to the
Governor-General-in-Council.

2.41
New Sections 35A and 35B of the CE Act allow the Government,
through a regulation, to apply liability to a natural gas supplier
or end user respectively. In making any necessary
regulations, consideration would be given to the administrative
efficiency of placing the liability on either the supplier or end
user. [Item 52, section 35A, CE
Act] [Item 52, section 35B, CE
Act] The regulation would be a
legislative instrument for the purposes of the Legislative Instruments Act 2003 and
is a disallowable instrument.

2.42 Where natural gas is
supplied and no liability has arisen from that or any previous
supply of the natural gas under sections 33 and 35 of the CE Act,
and there is a reasonable expectation that no liability will arise
from the use of natural gas as a result of Part 3, Division 2 of
the CE Act, liability may be placed on the natural gas supplier
under new section 35A of the CE Act. Regulations may specify
an eligible financial year or years in which these arrangements
would apply. To provide parties with sufficient notice
regarding these arrangements, the specified eligible financial year
must be later than the financial year in which the regulations are
registered under the Legislative
Instruments Act 2003 . [Item 52, section 35A, CE
Act] . Liability would apply to a natural gas
supplier if:

â¢
it supplies natural gas;

â¢
no liability has arisen as a result of sections 33 or 35 of the CE
Act;

â¢
the supplier does not reasonably expect use of the natural gas will
be covered by the direct emitter provisions in Part 3, Division 2
of the CE Act at the time the gas is supplied; and

â¢
the conditions in the regulations are satisfied.

2.43
In certain circumstances, natural gas suppliers may not have
sufficient information to determine the intended use of the gas
supplied. For example, a supplier may not be reasonably
expected to know the intended use of natural gas supplied to a
person at an inlet flange of a natural gas supply pipeline where
that person arranges their own transport of the gas. So that
a supplier may form a reasonable expectation that the natural gas
is supplied for use and know the amount supplied for use, an
‘own-use notification’ and a ‘follow-up
notification’ from the end user could be required as
conditions in the regulations. Further information about
own-use notifications and follow-up notifications is set out in
paragraphs 2.44 to 2.48 below. [Item 52, subsection 35A(1)(d), CE
Act] The definition of
‘accept’ in section 5 of the CE Act has been updated to
reflect these changes to the treatment of natural gas
suppliers. [Item 28, section 5, CE
Act]

2.44
If an own-use notification were to apply, the supplier could have a
preliminary emissions number for the embodied emissions in the
whole amount of natural gas supplied. The sum of preliminary
emissions numbers for a supplier is a PEN, but this can be reduced
by netted out numbers. A supplier may have a netted-out
number where a follow-up notification has been provided by the end
user to its supplier to report the amount of natural gas applied to
own use. The remainder of the natural gas supplied, not
subject to the follow-up notification, would be the netted-out
number. [Item 52, section 35A, CE
Act]

2.45
The Government may make regulations that permit or require a person
to give an own-use notification to their natural gas
supplier. This could permit or require the person to notify
their supplier and therefore have liability for the natural gas
rest with the supplier. This facilitates the application of
liability to a supplier where, in the absence of such a
notification, they could not readily form an expectation that the
natural gas is supplied for use or know the portion of a supply
which is for the person’s use. [Item 39, section 5, CE Act] [Item 53,
sections 64A-64C, CE Act]

2.46
Regulations may be made that permit or require a supplier to accept
an own-use notification from their customer. This could
permit or require the supplier to accept the notification of own
use and therefore have liability for the natural gas rest with the
supplier. Where conditions in the regulations are satisfied,
this could allow the supplier to effectively reject an own-use
notification. [Item 39, section 5, CE Act] [Item 53,
sections 64D-64E, CE Act]

2.47
A person must not provide an own-use notification if they are not
permitted or required to do so under section 64A or 64B of the CE
Act. If a person provides an own-use notification where they
are not permitted or required to do so, then the own-use
notification is taken not to have been given. This limitation
is provided to avoid the risk of misuse of an own-use notification,
where the misuse could lead to avoidance of liability.
[Item 53, section 64F, CE
Act]

2.48
To ensure that such misuse does not occur, a person is also liable
to pay a civil penalty if a court finds that the person has
provided an own-use notification and they are not permitted or
required to do so by the CE Act (see paragraphs 2.56 to 2.58
below). [Item 53, section 64F(3), CE
Act]

2.49
Regulations may be made that permit a person to give a follow-up
notification to their natural gas supplier in relation to a supply
of natural gas which is subject to an own-use notification.
This could allow the person to inform their supplier of the amount
of natural gas taken for own use. A supplier would not have
the ability to not accept a follow-up notification.
[Item 37, section 5, CE Act] [Item 53,
sections 64G-64H, CE Act]

2.50
A person must not provide a follow-up notification if they are not
permitted or required to do so under section 64G of the CE
Act. If a person provides a follow-up notification where they
are not permitted or required to do so, the follow-up notification
is taken not to have been given. This limitation is provided
to avoid the risk of misuse of a follow-up notification, where the
misuse could lead to avoidance of liability. [Item 53, section 64J, CE
Act] To ensure that such misuse does
not occur, a person is also liable to pay a civil penalty if a
court finds that the person has provided a ‘follow-up’
notification and they are not permitted or required to do so by the
CE Act (see paragraphs 2.56 to 2.58 below). [Item 53, section 64J(3), CE
Act]

2.51
Where a supplier has a liability under section 35A and an own-use
notification is provided in relation to an amount of natural gas,
or the conditions in the regulations are satisfied, the emissions
attributable to the gas do not count under sections 20 to 25 of the
CE Act. This ensures liability does not arise for both the
supplier and user of the gas. However, the amount of natural
gas associated with the own-use notification does count for the
purposes of determining whether a facility meets relevant
thresholds for liability. [Item 46, section 20, CE Act] [Item 47,
section 21, CE Act] [Item 48, section 22, CE Act] [Item
49, section 23, CE Act] [Item 50, section 24, CE Act]
[Item 51, section 25, CE Act]

2.52 Section 5 of the CE
Act defines supply as supply (including re-supply) by way of
sale, exchange or gift. Regulations can determine whether
there is or is not a supply of natural gas for the purposes of new
section 35A of the CE Act. It allows an act or circumstance,
which might be combination of acts and conditions, to constitute a
supply. New section 35A of the CE Act will generally operate
consistently with the commercial arrangements that industry would
consider constitutes a supply of natural gas. For example,
the transfer of title from owners or operators of natural gas
supply pipelines to end users for the purpose of providing pipeline
services would not generally be considered a supply. In such
circumstances another entity such as a producer or retailer of
natural gas would typically be considered to be making a supply to
the end user. [Item 41, section 5, CE Act] [Item 42,
section 5, CE Act] [Item 43, section 5A, CE
Act]

2.53
To provide sufficient notice of any changed arrangements to
affected liable entities, the Government may make regulations which
specify an eligible financial year or years in which these
arrangements would apply. The specified eligible financial
year must be later than the financial year in which the regulations
are registered under the Legislative Instruments Act
2003 . [Item 41, section 5, CE Act] [Item 42,
section 5, CE Act] [Item 43, section 5A, CE Act]
The regulation would be a
legislative instrument for the purposes of the Legislative Instruments Act 2003 and
is a disallowable instrument.

2.54 Section 6 of the CE
Act specifies when supply of natural gas occurs. Currently
regulations made for the purpose of the existing definition of
supply provide for supply to occur in reference to
the time of withdrawal. As new section 5A of the CE Act
provides for modifying the definition of supply for the purposes of
new section 35A of the CE Act, and as the concept of withdrawal
might not apply in 35A, the regulations will need to determine when
a supply of natural gas occurs in relation to section
35A.

2.55
To provide sufficient notice of any changed arrangements to
affected liable entities, the Government may make regulations which
specify an eligible financial year or years in which these
arrangements would apply. The specified eligible financial
year must be later than the financial year in which the regulations
are registered under the Legislative Instruments Act
2003 . [Item 44, section 6, CE Act] [Item 45,
section 6, CE Act] The regulation
would be a legislative instrument for the purposes of the
Legislative Instruments Act
2003 and is a disallowable instrument.

2.56
Where no liability has arisen from the use of natural gas as a
result of Part 3, Division 2 or sections 33 and 35 or new section
35A of the CE Act, liability may be placed on the natural gas end
user under new section 35B of the CE Act . Liability
would apply to a person where natural gas is applied to a
person’s own use if: [Item 52, section 35B, CE
Act]

â¢
no liability has arisen as a result of sections 33 or 35 or new
section 35A of the CE Act;

â¢
use of the natural gas will not be covered by the direct emitter
provisions in Part 3, Division 2 of the CE Act; and

â¢
the conditions in the regulations are satisfied.

2.57
To provide sufficient notice of any changed arrangements to
affected liable entities, the Government may make regulations which
specify an eligible financial year or years in which these
arrangements would apply. The specified eligible financial
year must be later than the financial year in which the regulations
are registered under the Legislative Instruments Act
2003 . [Item 52, section 35B, CE
Act] The regulation would be a
legislative instrument for the purposes of the Legislative Instruments Act 2003 and
is a disallowable instrument.

Civil penalties and infringement
notices

2.58
New sections 64B, 64D, 64E, 64F and 64J of the CE Act are covered
by existing civil penalty provisions in Part 17 of the CE
Act. Subsection 252(4) of the CE Act provides that the
pecuniary penalty payable by a body corporate must not exceed
10,000 penalty units (currently $1.1 million) for each
contravention of a civil penalty provision. Subsection 252(6)
of the CE Act provides that the pecuniary penalty payable by a
person other than a body corporate must not exceed 2,000 penalty
units (currently $220,000) for each contravention. The
maximum levels of civil penalties reflect the seriousness of the
contraventions and represent clear and strong disincentives for
non-compliance. Any civil penalties provided for in the CE
Act are maximums and any penalty that may be imposed by a court
will be determined according to the circumstances of the particular
case. The integrity of the carbon pricing mechanism could be
compromised by liable entities or other market participants acting
in a manner that is designed to avoid liability or mislead the
Regulator by misusing the natural gas notification
provisions. For further information about the application of
civil penalties under the CE Act see paragraphs 7.73 to 7.94 of the
Revised Explanatory Memorandum to the Clean Energy Bill
2011 . [Item 53, new section
64B(2), CE Act] [Item 53, new section 64D(7), CE Act]
[Item 53, new section 64E(7), CE Act] [Item 53, new section
64F(3), CE Act] [Item 53, new section 64J(3), CE
Act]

2.59
As a civil penalty applies to misusing the natural gas notification
provisions, a person may also be the subject of an infringement
notice under Part 18 of the CE Act. The applicable
infringement notice penalty would be 2,000 penalty units (currently
$220,000) for a corporation or 400 penalty units (currently
$44,000) for any other person. For further information about
the application of infringement notices under the CE Act see
paragraphs 7.58 to 7.72 of the Revised Explanatory Memorandum to
the Clean Energy Bill 2011.

2.60
In a proceeding for a civil penalty order against a person for
misusing the natural gas notification provisions, it is not
necessary to prove that person’s state of mind, including the
person’s intention, knowledge, recklessness, negligence or
any other state of mind under section 262 of the CE Act.
Implicit in this is a reasonable expectation that those subject to
the provision will take steps to prevent inadvertent
contraventions. [Item 88, subsections 262(1)(ma)-262(1)(me), CE
Act]

Changes to the Opt-in Scheme eligibility
test

2.61
The Opt-in Scheme is to be set out in regulations. A person
who meets the Opt-in Scheme’s criteria can choose to have
emissions from specified liquid fuels covered directly under the
carbon pricing mechanism instead of paying an equivalent carbon
price through the fuel tax system. The amendments augment the
existing provisions of Part 3, Division 7 of the CE Act. [13]

2.62
The eligibility test that must be passed by a designated opt-in
person for that person to be liable for the potential emissions
embodied in an amount of fuel makes reference to three classes of
persons: members of a GST group, participants in a GST joint
venture, and persons that are entitled to fuel tax credits for the
fuel.